Everything is leveraged

Sometimes a phrase jumps off the page. So it was reading interviews with a selection of corporate high flyers in the latest McKinsey Quarterly. Carlos Ghosn CEO of Nissan says; ‘We are going to have a lot more of these external crises, because we are living in such a volatile world – an age where everything is leveraged…’

We most associate this idea with two different but related financial processes. The first is a kind of betting in which a focus on the margins means that small real world movements can add up to big profits and losses. The second refers to the process by which a bank, company, individual or nation uses various devices to borrow and trade money substantially in excess of its asset base. Indeed, as Martin Wolf described in this morning’s FT, the current economic crisis is fundamentally about the difficulty of de-leveraging debt in banks, nations, companies and households while avoiding a depression.

But Ghosn is, I suspect, making a more general point about the relationship between marginal change and major consequences. Many company leaders complain that the risk of over-reaction by investors to small and probably short-term changes in share prices make it difficult to manage for the longer term. Indeed it was this which led Unilever CEO Paul Polman to take the brave and widely lauded step of ending quarterly reporting by his company.

I don’t suppose the Nissan CEO is a great expert of the regulation of English schools. But he might have felt some empathy for the head teacher of a Suffolk secondary who I heard complain last week that the unremiting focus on year to year GCSE score movements had driven out any appreciation of the more fundamental components and drivers of school success.

Many forces contribute to a world where everything is leveraged but perhaps technological change (making it easier to access and manipulate information) and a decline in public trust in, and deference towards, authority are the most important.

But not all is change. Psychologists tell us that the imprint of genetics and socialisation are such that after much less time than we might imagine the effects of good fortune or bad subside and we return to our happiness ‘set point’. As we get older we fall into those patterns of thought and behaviour we observed in our parents and hubristically imagined we would resist.

A great unknown of our lives is that most of our characteristics won’t change very much but some will change completely. The great known is that we are poor at predicting which is which. As Philip Gould movingly testified, we continue to surprise and disappoint ourselves right up to the end.

I guess I thought that as I got older I would become more emotionally secure and less needy. I assumed I would gradually be less affected by the performance of my football team. But next season, as usual, I will rely on West Bromwich Albion to provide escapism from the daily grind of proving to myself I am a person of any value whatsoever.

What does it mean; this disjunction between the leveraged outer world and the largely constant inner? Given our cognitive frailties (‘how vainly men themselves amaze’ as Andrew Marvell wrote) we all too easily mistake the regular tides of our emotions for life changing tsunamis. It is an illusion reinforced by an economic system which requires us to strive at work and spend the money we earn (and a little bit more) as if our lives depended on it.

It is like living all our lives in that moment as a train starts its journey when our senses are unsure whether it is us or the station that is moving.

This is an age where everything is leveraged: Obviously yes, profoundly no.