Please sir, may I have some more?

To: Hank P.

CC: US Congress

BCC: US Taxpayers

Subject: Financial Crisis

_______________________________________

Dear Hank,

My balance sheet is starting to look like an investment bank as my debt to equity ratio dives into negative territory, because the market value of my assets is neither higher than the historical cost nor the leverage used to purchase them.  I have invested heavily in human capital through education generating some additional long-term liabilities with no recognizable intangible asset as these costs are expensed as incurred.  However, I am sure you understand that my current dilemma is mostly due to the under-exuberance in the current market and not a fundamental change in the intrinsic value of my personal enterprise.

I know it seems my main street issues are miniscule compared to those you are dealing with on Wall Street, but really they are the same issues with scale being the main difference.  I will not get rewarded or even have a safety net for the poor decision making I have exhibited leading to my negative cash flow, and I will learn to make better decisions next time.  Regardless of scale, this is the lesson of the free market.

Finally it was interesting to see how your financial emergency turned into an oinking good time on capital hill as they padded an extra 15% onto your already generous figure to raise the votes needed for passage.  I guess these are just some ‘brokerage fees’ needed to get the deal done.  I am sure my grandchildren will look back on this event fondly when they are still trying to make the interest payments on an increasing Federal debt load and still have enough money for the freeloader programs.

Thanks for your consideration,

Personally upside down taxpayer that’s not getting bailed out

Charting Value

One of my teachers told me to draw a picture to better understand a problem.  So this crude chart is my attempt at making an economic depiction of the value pricing proposition compared to the hourly billing model.  Your service generally has a set value to the client, which is the maximum price they are willing to pay for your work.  If your price is based on hours worked as shown by line P, then as your hours increase, your price increases according to the rate. 

So long as your total hours keep your price under the value line, you will easily collect what you bill, as the client knows they would have paid more and feel they have received your services at a discount to their value.  However, if your hours put you at a price point above the value line, the client will either pay grudgingly or attempt to negotiate back down to the value line.  If you are consistently over this value line, you will encounter haggling with clients who don’t want to pay your price.

If you are consistently under this value line, then you are always leaving money on the table that the client would have given to you if you had asked for it.  This scenario is why value pricing increases profitability.  The efficient service provider is punished in an hourly pricing model (same profit margin with less total revenue), but will be rewarded in a value based model with a higher profit margin and higher total revenue.

Good economics dictates that firms wish to maximize profit, not billable hours.  Be efficient, deliver great value, and make obscene profits by pricing for value.

America, we can’t handle the truth

I was amazed at the grilling Phil Gramm took for observing a fact about the American public.  Tossed under the bus so quick he hardly saw it coming at him.  The fact that Phil Gramm had to be tossed aside so quickly is a testament to the degree of truth in his comments.

The financial hardships being felt by Americans around the country are in no way comparable to those suffered during the great depression.  The metrics on our economy are not great right now (especially if you change the way we calculate a few things), but the wheels have not fallen off yet and we are not suffering a great detriment to our way of life.  Thus I agree that we are over-whining and under-solving with regards to the problems at hand.

We are told by financial advisers to diversify, but we have put all our transportation energy eggs in one basket, and those eggs and the basket come from countries that don’t care about us and may even harbor resentment and hostilities towards us.  We need to diversify our energy portfolio and not look for one magic bullet to solve all the problems.  In interests of national security, we should make sure that this diversification also leads to energy independence so that we can act for what is right in the world rather than for what keeps us moving.