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Starbucks on the way out

July 29th, 2008

Since I’ve previously commented quite a few times about Starbucks, I thought I should note this news. It’s a pity for those who will lose their jobs in a softening labour market, but not really a surprise.

Update A letter in the Fin Review makes the point that Starbucks suffered in competition with Gloria Jeans (for non-Oz readers, a truly horrible food court coffee chain, closely associated with one of our less appealing churches), because GJ is a franchise operation, with most franchisees being small enough to avoid payroll tax, while Starbucks were company-owned and had to pay. If the coming tax review could get rid of payroll tax, it would be a huge boon.

  1. Ian Gould
    July 31st, 2008 at 17:20 | #1

    FWIW,

    http://zfacts.com/p/318.html

    US public debt as a percentage of GDP is lower now than it was under Truman and Eisenhower and Reagan.

  2. observa
    July 31st, 2008 at 17:23 | #2

    “What percentage of world output does the current credit represent and how does that compare with prior credit expansions prior to recessions?”
    You and I are about to find that out Ian. As far as the US goes apparently it’s around $0.7 trillion in a $13 trillion annual economy that’s also racking up some rather unsustainable internal liabilities to boot. True the latter can be wiped out at the whim of Congress, but the former won’t go away so quite so easily if that’s a word to describe such a monumental paradigm shift.

    “so there’s no connection between the hundreds of billions of western investment capital flowing into China (and Inbdia et al) over the past decade and that massive increase in their industrial output?”
    Clearly there is, but why when China is so hungry for imported capital would it run such surpluses through artificial currency controls? I would have thought a trade balance that covers imports and capital borrowings would have been kinder to the natives than saddling them with worthless sub-prime paper, but hey, what would I know? Mounting IOUs are all the rage they tell me.

  3. Ian Gould
    July 31st, 2008 at 17:26 | #3

    While I’m at it Observa, I’m sure you’ll also take into account the increase of assets relative to GDP in discussing the increase in NET indebtedness relative to GDP.

    http://www.mckinsey.com/mgi/publications/gcm/images/cap_markets_map.swf

  4. Ian Gould
    July 31st, 2008 at 17:58 | #4

    “h surpluses through artificial currency controls? I would have thought a trade balance that covers imports and capital borrowings would have been kinder to the natives than saddling them with worthless sub-prime paper, but hey, what would I know? Mounting IOUs are all the rage they tell me.”

    You know that a currency account surplus requires a capital account deficit and vice versa, right?

    The Chinese have been forced to buy US T-Bills to try and prop up the US dollar because their foreign trade (both imports and exports) is largely denominated in US dollars and because of their unwillingness to revalue the Yuan.

  5. smiths
    July 31st, 2008 at 19:01 | #5

    what about private debt ian, is that lower as well?

  6. July 31st, 2008 at 19:59 | #6

    smiths,
    So – are you opposed to people having the freedom to borrow as well – or are you not sure what you want in that line too?

  7. Ian Gould
    July 31st, 2008 at 21:14 | #7

    “what about private debt ian, is that lower as well?”

    What matter’s isn’t the headline debbt figure – which has been going up more or less continuously since records started without producing the economic apocalypse you and Observa think is aroudn the corner.

    What matters is the net debt position – debt less assets – and debt servicing ability.

    Private debt (which includes corporate debt as wel las hosuehold debt) has been rising consistently in Australia.

    So have the average assets of Australian assets.

    If you have a $50,000 mortgage on a property conservatively valued at $350,000 is that a cause for concern?

  8. Ian Gould
    July 31st, 2008 at 21:26 | #8

    “In 2002, the average Australian household held around $210,000 in wealth (total assets less total debts). Only four years later, this wealth has increased to around $340,000, primarily driven by increases in housing assets.”

    http://www.livinginaustralia.org/Results_Income.htm

    Peopel who’ve read my posts here over the last coupel of years shoudl be aware that I’m a social democrat, a passionate beliver in social justice and a supporter of radical action to redcue greenhosue has emissions.

    I’m acutely aware of the problems facign low incoem families in australia (probably more so than many other posters here). As I’ve said before, I think there’s a 50-50 chance Australia is heading into recession within the next eyar and I’m deeply concerned abotu the impact that’ll have on people’s lives.

    None of that is going to make me subscribe to an overly negative assessment of the Australia and world economcis which my training and experience as an economist tells me is simply wrong.

  9. Ian Gould
    July 31st, 2008 at 21:48 | #9

    As of 2006, only around 1% of Australian hosueholds had negative net wealth.

    http://209.85.141.104/search?q=cache:WDBezCNjAd4J:www.abs.gov.au/AUSSTATS/abs%40.nsf/DetailsPage/6554.02005-06%3FOpenDocument+Household+wealth+Australia&hl=en&ct=clnk&cd=5&gl=au&client=firefox-a

    Award super and growth in home values and share prices would have increased net assets and redcued the number of people with negative net assets.

    Much of that growth in assets has been lost in the past year, but that simply moves us back to the 2006 position.

    Some people will be badly hurt in the current downturn. (For example, anyone who bought an investment proeprty in the lead up to retirement with the intention of using super to pay down the debtr is facign a nasty double whammy.)

    GHowever the number of people in such situations is unlikely to be sufficient to produce a serious and sustained downturn in the Australian economy.

  10. Ian Gould
    July 31st, 2008 at 22:28 | #10

    THe Economist responds to the theotry that a US slowdown will result in disaster for China.

    Only around 1/3 of China’s economic growth is attributable to net exports.

    http://www.economist.com/finance/displaystory.cfm?story_id=10429271

    Quote:

    “And even if the contribution from net exports fell to zero, China’s GDP growth would still be close to 9% thanks to strong domestic demand. The boost from net exports is in any case unlikely to vanish, even if America does sink into recession, because exports to other emerging economies, where demand is more robust, are bigger than those to America. According to Standard Chartered Bank, Asia and the Middle East accounted for more than 40% of China’s export growth in the first ten months of 2007, North America for less than 10%.”

  11. observa
    August 1st, 2008 at 02:05 | #11

    Hey Ian-
    http://www.doctorhousingbubble.com/
    Gulp!
    Not to worry, the US Congress has the problem well in hand with Freddie and Fannie sucking on the taxpayer teat now. Wonder how that’s been accommodated in the national debt figures. Hmmm.. no doubt just like the National Bank did with all its similar provisioning back in May. A quick change of CEOs does the trick they tell me and welcome aboard Obama eh?

    As for that lovely McKinsey world picture, I didn’t notice any mention of real trillions between 1993 values and 2003. On that point I read where an investment in the S&P 500 in 1997 would see the US investor with no real increase some 11 years later. Hard to imagine retiring on those returns which is no doubt why many thought they’d buy bricks and mortar instead. Perhaps they ought to talk to the Japanese tigers about that road to retirement with half a percent interest rates now. You know, the mob with that Tokyo RE valued at US $1.5mill/squ metre once. Apparently they could boast then the land under the Royal Palace was worth more than California before some nasty 70-80% price falls at one stage. err…hang about, they might still be right.

  12. Ian Gould
    August 1st, 2008 at 10:41 | #12

    “On that point I read where an investment in the S&P 500 in 1997 would see the US investor with no real increase some 11 years later.”

    Yeah that’s waht happens if you cherry-pick the top of a boom and the bottom of the subsequent crash.

  13. Ian Gould
    August 1st, 2008 at 10:56 | #13

    Oh and Observa thank you for pointing out that the extremely severe real estate bubble in Japan produced exactly none of the dire effects on the real economy you keep predicting for the US and the rest of the world.

  14. Ian Gould
    August 1st, 2008 at 11:08 | #14

    As for your claim that the McKinsey figures are in nominal rather than inflation-adjusted terms – I’m tryign to think of a resposne that wouldn;t breach John’s comments policy.

    The full McKinsey report is available only to registered users and I have no intention of wastign my money.

    So, if you wish to beleive that:

    a. one of the largest and most respected consultant firms in the world either made a blunder that would embarass a first year Economics student or chose to risk them reputation by telling a stunning stupid and transparent lie; and

    b. that there no effectively NO growth in gross (not net) assets inclduign both stocks, property and physical goods in the decade that incldued the tech boom and much of the industrialisation of China and saw the US repay most of its national debt;

    then you are free to do so.

  15. observa
    August 1st, 2008 at 11:18 | #15

    True Ian but I think we’re all from the bottom at present. Here, retail sales figures falling(and that with prices sky high) and now manufacturing and Rudd’s calling on the banks to pass on any interest rate cuts pronto. What a dreamer. The Reserve won’t cut rates officially because they know they’ll look stupid as the market ignores them. Credit is collapsing everywhere, just as it leveraged itself upwards for years. There’s a scarcity of real savers now.

    Here’s the latest taste from Mogambo on US debt
    http://www.atimes.com/atimes/Global_Economy/JH01Dj01.html
    and note just exactly when the US passed that Depression era indebtedness ratio and its size relative to income now. Gulp!

    He’s right about those supplier price rises coming through now with hefty regularity. Inflation is going gangbusters now with official stats lagging hopelessly, or in the US case being fudged terribly. Savers will have to receive real returns and that means interest rates chasing 2-3% above double digit inflation shortly. We’re all freaking doomed now for a long long time to unravel all this. Having said that, with our natural wealth per capita, we are still some of the luckiest bastards on earth in all of this.

  16. observa
    August 1st, 2008 at 11:42 | #16

    I’ll take your point on McKinsey Ian but notice Japan’s growth relative to the other MDCs and ask yourself why the discrepancy? You might like to ponder the answer to that in the real value of assets prior to Black Tuesday 1929 and a year or so later. The real problem was not the sudden one day fall but the dead cat bounces over the next year or so that enticed real savers back in repeatedly and wiped them out continuously. That’s my take on stock markets and housing prices now, not to mention those Super funds. Here’s a typical sample now-
    http://www.news.com.au/business/story/0,27753,24111345-31037,00.html

  17. smiths
    August 1st, 2008 at 13:48 | #17

    its hard for me to comprehend what you two are actually saying, andrew and ian, i scarth my head and struggle to beleive i am reading,

    so if i could just ask to clear things up,

    is the stupendous level of private debt in australia actually an irrelevance,

    is the prospect of a significant world recession in the real economies a load of rubbish,

    are there no actual real world deflationary effects at all occurring currently

    is the financial system sound

  18. smiths
    August 1st, 2008 at 13:49 | #18

    by the looks of that post i struggle to spell whilst i scratch my head as well

  19. Ian Gould
    August 1st, 2008 at 22:09 | #19

    “is the stupendous level of private debt in australia actually an irrelevance,”

    Yes. Becasue people’s assets have increased even more than their debts. Private companies have increased borrowing signficantly but that’s mainly because of the massive investment goign on in the mining sector.

    “is the prospect of a significant world recession in the real economies a load of rubbish”

    It depends on what you mean by “signifcant”. I think the US will probably have a recession but not necessarily any worse than the one in the early 1990′s. At the time, people were predicting a massive depression and citing pretty much the exact same evidence people are citing now.

    I’m not sure the world will have a recession becasue the US is a smaller part of the wordl economy than it used to be and China, India and much of the rest of the developign world is positively booming.

    Seeing as the Asutralian economy is now pretty much oriented towards supplying China and Japan, I think there’s only a 50-50 chance we’ll have a recession here.

    “are there no actual real world deflationary effects at all occurring currently”

    I’m not sure what you mean by “deflatioanry” here. Presumably you don;t mean it in the sense of the opposite of inflation since inflatiion’s at the highest level in 10 years in most of the world.

    If you mean factors likely to cause the economy to slow – I think the US hosuign bust has a littel bit further to go and I think US interest rates are going to have to rise soon.

    Whoever is elected Presdient of the US is going to have to raise taxes and contain spending (which is how Bush and Clinton wound back the massive deficits left by Reagan.) We saw in the 1990′s that such a policy doesn’t have to mean slow economic growth.

  20. observa
    August 2nd, 2008 at 10:14 | #20

    The problem is Ian that to overcome the bad nedicine of past credit expansions and contractions, the world’s central bankers, particularly the US Fed pumped more liquidity at the problem but now they have a massive solvency crisis on their hands as a result. They cannot throw money at a solvency crisis any longer and that’s obvious now that the banks are saying their interest costs have decoupled from the Reserve. That’s why the Reserve won’t cut rates now, lest they look as impotent as they really are.

    As for the US being less important in the big scheme of things, you overlook that one third of China’s economy is export manufactures and with the EU and US markets collapsing fast, that’s a huge problem for them too. China, by currency controls and selective tarriffs, etc has run massive surpluses similar to the first Asian tiger, Japan and look where that got them? A Nikkei that hit around 39000 then back to 7600 and now 13100 today and a decade of stagnation, which they were only just coming out of to guess what…? China should have been using its past savings for local consumption and investment rather than subsidising MDC consumers and purchasing their IOUs. It will rue the consequences of doing that now as it’s export economy collapses along with MDC demand now.

    There are only 2 possibilities for the world economy now. Short and terrible or long and very painful stagflation. No doubt central bankers will choose the latter if they possibly can. Why wouldn’t they as it makes then feel important and needed and justifies those salaries.

  21. observa
    August 2nd, 2008 at 10:39 | #21

    Let me tell you why our economy has tanked so quickly with all the bad news this week and more to come quickfire. Thousands of fixed rate GenY mortgages like my nephew’s and his wife’s have gone variable this past 6 months. They were paying 6.25% fixed as they and thousands of other locked in for 2-3 yrs as interest rates began to rise. Welcome to 9.67%, fuel prices, etc now and no more Starbucks for them. That’s why Westpac offer me at call, 7.05% calced daily, payable monthly, interest on any money swept from my transaction account into an e-saver account at the click of a button. I can get 8.6% term payable annually but why would I under current circumstances? Wait and see what happens to asset prices with the readies handy is the obvious strategy now. Basically cash is king, although there’s a scarcity of kings now and hence those decoupled interest rates. If selling of assets begins in earnest to get cashed up, it will test your theory about all that wealth protecting all that borrowing. We’ll see Ian.

  22. Ian Gould
    August 2nd, 2008 at 10:42 | #22

    As I said we shall see.

    You’ve now put yourself on record predicting double-digit inflation, 80% redcutions in US realestate prices and and interest rates and a recession in China.

    Let’s revisit those predictions at the end of the year.

  23. smiths
    August 4th, 2008 at 10:29 | #23

    this is from alan kohler at business specatator,
    he thinks the the private debt will be a problem,
    so does steve keen at ozdebtwatch, so does Robert Gottliebsen who predicts a lifestyle revolution in this country,
    oh well, they must all be wrong, again

    Starbucks’ announcement last month that it is closing 61 of its 84 Australian stores is a sign of things to come for cafes. But it’s not just closures that will be the problem. As coffee consumption falls, café incomes will be crimped, staff will get fewer shifts and owners will have to cut back spending elsewhere.

    And while the lower end of the workplace is having their shifts cut back, the top end is copping bonus shrinkage.

    Those whose bonuses are tied to share prices are already in trouble; those who have got used to nice annual bonuses based on sales and profit growth have got a pay cut coming.

    And the other big change since the last recession is the level of aggregate household debt.

    At the individual level this means that many people with variable incomes – contractors, casual retail workers, café owners, executives on low bases and high bonuses – have geared themselves to peak incomes because they thought it would last forever (or else they didn’t really think about it).

    As those incomes fall, even though they still have a job, desperation will set in. The cutback in non-essential spending from the new working poor will be more dramatic than we have ever seen.

    As a result we could be in for the first full employment recession in history as demand and output contract while everyone, apparently, still has a job.

  24. Stephen L
    August 4th, 2008 at 14:00 | #24

    I can’t follow all the arguements, but I love the sight of a social democrat defending the basic integrity of the global capitalist system, while a right-wing libertarian says its been so rigged we’re heading for disaster.

    This isn’t meant to suggest either of you are hypocrits, just a comment on the extent of the political shifts going on.

    I’m not one of those who thinks left and right are obsolete terms, rather that their real meanings are now re-emerging after being partly buried for a while.

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