How to succeed

There are a lot of opinions about the economy, how it got the way it is, and which direction it is going. If you read the opinion pages of the Wall Street Journal and then editorials in the New York Times, you are likely to encounter diametrically opposing viewpoints. And these are both highly respected publications located a relative stone's throw away from each other. Then if you consider the fact that supposedly professional people--experts, economists, etc.--cluelessly led us down the path that led to what almost became the largest financial debacle of all time, you start to wonder if anyone really knows what is going on here.

On the other hand, some of the things they did to avert Great Depression II may have actually saved us. Well, we hope so, anyway.

It could be that the world economy has grown to a point that it has outstripped our ability to understand and manage it. My guess is, however, that there are people who understand it, but they were standing on the outside while people who did not understand it tried to manage it--unsuccessfully.

Be that as it may, the question for a business person is, where do I go from here? The question for an individual or a business is not a macroeconomic one. It is a microeconomic one. What can I do to survive and prosper in these times?

First of all, one has to assume that there will continue to be some economic life. Even during the Depression, life went on. There are many businesses in existence today that survived the Depression. Although it was bad, it was not a doomsday event. And what is happening today is, at least so far, nowhere near as bad as that.

There are still some people who are predicting silly things like hyperinflationary deflation, or some such oxymoron. We needn't pay attention to them. There is always somebody predicting the end of the world.

On the other hand, although we appear to be in a recovery now, it is not time to exhale just yet. We do not know if the recovery will be steady or rough, or if there will be a relapse.

Unfortunately, the best time to plan for times like these is before they happen.

One of the best defenses is to have reserves, and they should be built up during the good times so that you can fall back on them if necessary during bad times.

Another good defense is to have a good profit margin that can stand being squeezed a little in lean times.

Flexibility is a good thing, for example not having too many fixed costs that you can't get rid of. Any time you have a choice between adding fixed costs and doing something that can easily be scaled back, the more flexible route should always be given careful consideration.

Over-expansion is probably the basic cause of any subsequent downturn, and the same can be true at the individual business level. If you add a lot of assets and debts to try to keep up with business when times are good, those extra assets and debts can become like albatrosses around your neck if business slows down. There is a pace at which you can expand safely--a pace at which you can finance your expansion with your own profits rather than with debts.

Of course there is a time for debt, such as for a carefully evaluated project whose expected profits are greater than the cost of the debt.

One of the lessons of this experience is that it is a mistake to believe that good times will never end. No matter how hard the folks in Washington try, they cannot repeal the basic business cycle. There will always be recessions as long as there is capitalism. In fact, the harder they try, the harder the eventual reckoning to follow.