I don’t think the analogy works, unless you are talking about paper-readiness, in which case this country looks pretty good financially. Anyone who has ever served in the military knows the reliability of paper-readiness reports. However, the economic day of reckoning, when the American dollar is tested against other securities, is probably closer than some might want to believe. Warren Buffett (and the rest of the Wall Street titans) have already traded much of their liquid-dollar readiness into something more stable. Like a little fire on the stove, the debt-crisis in Greece, could spark a global financial meltdown and the collapse of the US dollar as the world’s chief reserve currency. Despite the calm words from government officials, the US Federal Reserve is not prepared for this battle. Mounting debt is simply not sustainable. Buffett, like one of those WWI generals seated in his chateau from the trenches will not suffer, but lots of folks with a dollar-denominated IRAs and pensions will.

Didn't John Boyd already do this?
Actually, it was Chet Richards who (explicitly) connected Boyd's maneuver warfare theory to business.
That said, companies like Toyota, who embrace large cash reserves and time as a competitive advantage apply many of the same principles as a pilot who maintains an energy advantage in his fighter, or a ground commander who keeps his tanks fueled and crews keyed-up.

Unlike cash, combat readiness if not as fungible. Being combat ready to fight Soviet forces does not mean you are as combat ready to conduct counter insurgency operations.

You could consider Cash (M0: Coins and Currency) to be like Large numbers of Infantry. No matter what the need, if you have enough combat ready Infantry, you can hold your own (Iran v Iraq is an example. Iran's Infantry held back Iraq's Mech).

Having a combat ready army prepared to fight Soviet forces could be similar to having your liquidity tied up in M2/M3 and MZM. Transferring these liqidity types to incurs alot of transactions costs but might be necessary since in some crises, they might not be as transferable (i.e. armor companys performing house clearing in Iraq in 2003).

Tom,

I am not sure you like the implications of applying this analogy. If Buffet's liquidity is having a large amount of a fungible asset on hand ready to utilize quickly as events unfold in unexpected ways, then it seems the national defense equivalent would be to have a large defense establishment with that had assets to respond to any type of contingency anywhere on the planet. That would require more people, machines, infrastructure, and training. Not quite possible in an era where most expect at least some declining defense budgets in the future.

And yeah, Boyd did it, but the tactical manifestation of OODA loops in air combat does not scale up to the strategic level so easily. Managing E in a dogfight is a matter of observation and management...the assets are fixed given the platforms involved int he fight. At a strategic level you have a choice what platform to fight with and thus size and configuration matter.

Liquidity in business functions as a reserve and you use it in the same way it’s used in a military: to handle uncertainty. Businesses determine how much liquidity to maintain for many of the same reasons military planners determine the size of a reserve. How much risk do we want to assume? What don’t we know that scares us? Can we use those assets better anywhere else or at a later time when conditions change. Committing liquidity is a major decision.

I work for a chip manufacturer which maintains around $12B in liquid assets (+/-) a billion or two. We have to determine when to commit money (our reserve) for the best return and this usually happens at specific points in technology development. We made a major bet a few years ago to commit a large part of our cash assets to improve our competitive advantage by developing faster, smaller processors while our competitors sat out. They were betting the technology wasn’t worth the return on investment; we were betting we could make it worth it if we executed well. We won the bet and as a result, not only have they fallen behind, they are having a hard time generating enough revenue to even keep up. Essentially, we used the principle of “mass” to commit our assets at the decisive time.

Interesting subject. In his discussion on whether man’s conduct war was in realm of arts or sciences Old Dead Carl said that it was actually closer to business which is just a different type of conflict of human interests and activities (and even considers politics as commerce on a larger scale.)

If you’re looking at interesting comparisons between business and warfare look how the concept of money and force has evolved. 100 years ago, we valued money and force by literally how much it weighed or by quantity. One ton of gold was obviously good and the battleship building spree before WW1, for example, was driven by the goal to have ships that had greater throw-weights from their main batteries than the enemy. With these “heavy” assets, your decision cycle is slow. It takes time to move one ton of gold, and it takes time to recycle those batteries and to move the ship into the ideal firing position vice the enemy.

“Money” today is electrons moving at the speed of light and has no mass. ( I know that gold is over $1.5k an ounce but it you had to wait until it physically got to the recipient until you got what you want, it wouldn't be worth anything).

In terms of killing systems, you still have to have some physical mass to destroy your target (for now) but that physical mass is much, much smaller. (How many B17s did it take to knock out a target in WWII?) Presently if you look at what engaged the target as a system, most of the value comes from electrons (intelligence, target acquisition, guidance) rather than payload. As a result of the these “massless” assets, decision cycles are very, very quick in both business and military actions.

Sorry for a long response – I’ve been lurking with an occasional comment. I did an advanced military studies program (SAAS) and an MBA within 5 years of each other so the military/business comparison has always fascinated me

Our brilliant Congress is already talking about reducing the size of our "standing army." But they still want to get the bucks for that un-needed second engine and to build dysfunctional littoral ships.

If you don't have cash in the kitty, you ain't got no liquidity. It will soon be 1939 with new unmanned systems and happy generals and manufacturers.

Strangely I had this very discussion with a colleague on Monday. He does economic modeling and was discussing the different types of market crashes, including the problem of too much liquidity. If there is too much cash looking to be invested, it starts to end up in places that are not worthy of investment. If capital can move too quickly between investments, companies cannot be secure enough in their resources to meet their operational commitments, such as payroll or hire new employees, much less make the long-term investments such as R&D. This seems very familiar to the problem of fighting with very, very thin forces in Iraq and Afghanistan, which limited strategic commitments (presumably providing political flexibility), but starved tactical forces of resources and depth, e.g. having to choose between patrolling neighborhoods or guarding prisoners.

If this is the case, then we need consider whether we can have too much liquidity in financial markets, and whether overemphasizing strategic flexibility creates the problem of making credible commitments to allies starving our tactical forces of the resources they need to succeed.

BOBPDX said it first.. Liquidity = Reserves ...IMO :)

I think that is a better analogy.

Army readiness comes from all the activities done to ensure men and equipment are ready to fight (eye exams, shot record updates, team-building events, maintenance).

The financial equipment might be all the things a company does to keep it's employees happy and productive. Google has great "readiness" because they keep their workforce uber-happy and are thus consistently ready to outperform other companies. I'm sure they have liquidity (reserves) too? So that makes them just overall uber-awesome.

-D1Safety03

equipment = equivalent

This seems like a page from the Han School of Geopolitics.

The political cost of calling up reserves (despite its abuse these last ten years) do not play the role of liquidity. Also, and all respect to everyone in the reserves, the time to full operational capacity once called up leaves either a lagging time problem or a lagging capability problem.

A more politically costly, less fungible asset is NOT liquidity.

Doesn't have to just mean the Army Reserves.. I actually meant it in a more local way. Reserves as in "QRF" or just "reserves." When a company plans an attack, it is good to identify some element as the "reserve" so you can have some 'liquidity.'

Anyway, I think the analogy is fitting..

""Keeping your powder dry"?? Super popular concept in finance for maintaining both cash assets in reserve as well as having things ready to sell/divest in order to quickly redeploy.

Origin

The allusion is to gunpowder which soldiers had to keep dry in order to be ready to fight when required. This advice reputedly originated with Oliver Cromwell during his campaign in Ireland. In Ballads of Ireland, 1856, Edward Hayes wrote:

"There is a well-authenticated anecdote of Cromwell. On a certain occasion, when his troops were about crossing a river to attack the enemy, he concluded an address, couched in the usual fanatic terms in use among them, with these words - 'put your trust in God; but mind to keep your powder dry'."

Meaning, you're hitting on an analogy that's maybe a few hundred years old already... and widely used in the financial world. Along with disparate other military expressions/references. Particularly among traders.

That said, I think the idea that "liquidity is the financial equivalent of combat readiness" is a little iffy when looked at from the military perspective (from the financial perspective, I think the comparison works fine); meaning, military
liquidity isn't simply about 'readiness' - readiness costs money. Liquidity is the willingness and ability to quickly 'liquidate' and redeploy existing assets into new areas that yield greater return. 'Combat readiness' has not traditionally had this kind of characteristic - e.g. Has the Raptor *really* provided any RoI, or will it? Some (many) use the argument of 'readiness' for a kind of justification for a lot of very low-return investments in high priced military infrastructure. And assets invested in many military programs are not easily (*understatement) moved into other areas despite obvious lack of real benefit. Yes, we've closed some unneeded bases and scrapped a few programs here and there, but trying to draw the analogy further i think runs into some fundamental problems between the types of investments and assets involved in military readiness (long-term, illiquid, generally always based on concepts that become obsolete even before the investment begins to mature).

Anyhoo... I think its good to look at people like Buffet to critique how the military does things. However, I do think that military concepts probably apply better to finance than vice-versa. But who knows, there's probably a pony in there somewhere.