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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. July 29th, 2008 at 22:46 | #1

    And to think the one to close in Hobart (the only one in Tas) has been open, what, a year?

  2. TerjeP
    July 29th, 2008 at 23:30 | #2

    Nice decor but the price is too high. IMHO.

  3. conrad
    July 30th, 2008 at 06:55 | #3

    The more surprising thing is that they were able to hang on for so long in cities like Melbourne where there are innumerate cafes on every major street. Given this, I doubt the total number of people employed selling coffee is likely to change at all in the long term.

  4. Spiros
    July 30th, 2008 at 08:50 | #4

    The Starbucks business model is bizarre. Putting a Starbucks on every corner just cannibalises other Starbucks. (If you think there’s a lot of them here, go to the US and check them out there. They are everywhere.)

    But of course the real reason for their failure here is the quality (and price) of their coffee. In the US, Starbucks is the best coffee you can get, Here, it’s the worst or close to it.

  5. ALan
    July 30th, 2008 at 10:10 | #5

    The problem with Starbucks was that their coffee was crap and if you live in the big cities where great coffee can be found on every corner why bother going somewhere for an inferior product? The sign at Starbucks “now brewing” showed they didn’t understand that serving filtered coffee that had been stewing on a hotplate for hours is not our idea of a good cup of coffee.
    News reports today said in part…”Starbucks president Howard Schultz ruled out closing other stores internationally and cited “challenges unique to the Australian market”.

    Retail analyst Barry Urquhart said Starbucks failed in Australia in part “because they didn’t understand and respect the unique and differing characteristics of the Australian coffee consumer”.

    “In America, Starbucks is a state of mind. In Australia, it was simply another player,” he said.
    Associate Professor Nick Wailes, a strategic management expert at the University of Sydney, said Starbucks had failed to understand the Australian market. “Starbucks’ original success had a lot to do with the fact that it introduced European coffee culture to a market that didn’t have this tradition. Australia has a fantastic and rich coffee culture and companies like Starbucks really struggle to compete with that.”

    The president of Starbucks Asia Pacific, John Culver, admitted: “I think what we’ve seen is that Australia has a very sophisticated coffee culture.”

    To which you have to ask don’t these companies do any research? Anyone who has tried to get a good cup of coffee in America knows they know nothing about good coffee even though they drink gallons of the stuff.
    Starbucks was a classic case of corporate arrogance and while sorry for all the workers who lost their jobs you can’t feel sorry for Starbucks. Of course Starbucks’ John Culver will keep his job and may even get a bonus for cutting costs so effectively.,
    How come the people who get the fire the bullets in corporations are the ones who should be heading out the door?

  6. July 30th, 2008 at 11:03 | #6

    We never got one in Perth (sniff).
    Good to see the market working BTW. Company spends money getting in, finds consumers do not like the product, makes losses, pulls out.
    What was another commenter here saying about consumer desires being manufactured by companies?

  7. observa
    July 30th, 2008 at 11:39 | #7

    Starbucks may just be fortuitously reacting to the coming demise of the cafe-latte/finacial intermediation/service economy as the large malinvestments caused by central bankers’ miscalculations over the past decade or so are unwound. No doubt Starbucks has some immediate problems with past expansion and the flight of credit now.
    I did hear yesterday some hospitality industry chap forecasting the demise of around 50% of the takeaway/coffee/cafe/restaurant market over the next few years as about that proportion are marginally profitable now according to him. Basically price rises in food, fuel and interest rates are about to hammer the discretionary economy. Notice how it starts in the US and then spreads here, albeit much more quickly nowadays in globalised economies.

  8. O6
    July 30th, 2008 at 11:45 | #8

    Alan got it right: dud coffee will eventually defeat hype and cultural cringe.
    The mines need 87,000 workers over the next few years, so I read. Perhaps the young people who were working at Starbucks will reduce the number of 457 visas offered.

  9. Spiros
    July 30th, 2008 at 12:11 | #9

    “What was another commenter here saying about consumer desires being manufactured by companies?”

    Yes, all that money spent on building brands is wasted.

  10. observa
    July 30th, 2008 at 12:14 | #10

    “The mines need 87,000 workers over the next few years,”
    Problem is 06, that’s based on past projections now. The question is how will world demand for resources hold up now as the developed debtor nations rapidly unwind. That alternative employment will evaporate rapidly I’d suggest. Essentially we’re about to take a large cut in real income one way or another and unfortunately our labour regulations mean only one way now. Either that or some more resort to the printing press coupled with Accord Mk2 to achieve more of the other. We’ll think about it all over another coffee eh?

  11. July 30th, 2008 at 13:15 | #11

    observa,
    Have a close look at China and India (add in Indonesia) and then tell us that demand from there is going to dry up soon. Include analysis of how dire their situation is and how little their people want to buy anything more than the amount they have.

  12. observa
    July 30th, 2008 at 14:06 | #12

    Trouble is Andrew they’ll have to buy them with US dollars and as one lone bloke is saying, something big is happening with those now-
    http://www.lewrockwell.com/paul/paul466.html
    I’ve been out of the stock market and into Perth Mint gold warrants and cash for some time now. You can get 7.05% and rising, at call, calculated daily, payable monthly at the click of a button now. The ASX index grew from 2500-6600 in 10 years and is now testing the 5000 support level domestically. I’m with Ron Paul on this now. Something really big is going down with the world’s fiat reserve currency and I know exactly what that means.

  13. smiths
    July 30th, 2008 at 14:16 | #13

    nice try observa,

    but i think you’ll find andrew knows best,
    in fact, you could say if andrew aint sayin it then it aint happening,

    my predcition is that when andrew finally recognises that his beloved corrupt mythical world of capitalism is eating its children and itself,

    then, and only then will the markets meltdown

  14. FDB
    July 30th, 2008 at 14:21 | #14

    “The more surprising thing is that they were able to hang on for so long in cities like Melbourne where there are innumerate cafes on every major street”

    So true. Why, just the other day on Collins I asked my barista whether, if a 109 tram left the Swanston St superstop at 9:23am, while a 112 travelling in the other direction turned off Spencer St at 9:17am….

  15. FDB
    July 30th, 2008 at 14:24 | #15

    This all makes me wonder why their Australian business model didn’t include provisions for making decent coffee. Like, y’know, find out what your customers expect and attempt to make money by selling it to them. Seems obvious… anyone got a theory?

  16. Ian Gould
    July 30th, 2008 at 14:40 | #16

    FDB – there’s nothing like massive business success to build arrogance and a sense of infallibility.

    Like the McDonaalds execs who eat there several times a week, the Starbucks management were probably convinced they had a superior product.

  17. hc
    July 30th, 2008 at 14:44 | #17

    I always liked Starbucks coffee because most cafes make coffee much too strong for my taste. The store in Collins St Melbourne I always enjoy for its quiet ambience – its a pleasant place to sit and watch the passing parade.

    In business courses I have long used Starbucks as an example of achieving core competencies by doing lots of things ‘in house’ – for example by roasting their own beans & using their own internal real estate people in selecting sites.

    For decades it has enjoyed incredible success from its modest beginnings in Seattle.

    Whoops! Back to the drawing boards with that case study!

    I am intrigued to read the various reasons people are advancing today for its failure. Maybe I can recast as a rise and fall story.

  18. July 30th, 2008 at 14:51 | #18

    smiths,
    I feel that if you knew what you wanted you might be able to get there. Until you do, though…

  19. observa
    July 30th, 2008 at 15:14 | #19

    Sweet Jesus, make mine a double Turkish! This is not a good time guys…
    http://www.news.com.au/business/story/0,27753,24101078-31037,00.html

  20. July 30th, 2008 at 15:24 | #20

    observa,
    Hmmm – bank glitch results in 1 day’s delayed payments for some people. OMG, the world is collapsing! Quick, stock up on canned beans!

  21. charles
    July 30th, 2008 at 15:44 | #21

    observa and Andrew place your bets, that is what investment is about. I would like to point out observa you can’t eat gold, drive it to the corner store or drink it in the morning. I strongly suspect that these are the sort of things people are going to continue to want to do.

  22. PeterRickwood
    July 30th, 2008 at 16:13 | #22

    Returning to cofee….

    I just dont understand how the making of `good’ coffee cannot be mechanized. What do Barista’s do that cannot be mechanized? Froth Milk? Surely this can be done `right’ by machine…. Put coffee grounds into a cup and attach it to a machine? Again, easily mechanized. Set the temperature nozzles? Come on! Can someone elighten me… what is the `art’ part to making coffee.

    Note, I’m not disagreeing that coffee from a good coffee shop is better than from, say, McDonalds. I buy my coffee, also, from someone who makes their living making it. I just dont understand what part of the process cannot be mechanized….

  23. July 30th, 2008 at 16:14 | #23

    I did buy some tinned soup yesterday – but I ate (drank?) it today. I guess that is really putting my money where my mouth is. [groans]
    I am also about to buy some bank shares. NAB is yielding over 9% (this of course does not constitute investment advice and you should consider your own position before making any investment. Perhaps also speak to an investment adviser…).

  24. smiths
    July 30th, 2008 at 16:19 | #24

    The error was an anomaly

    yeah, and the pope is a deeply spiritual man who devotes himself to compassion and love

    they probably should have tried perth, it generally has the worst coffee in australia,
    the best i’ve had was in melbourne at journal cafe in the ‘city library school thingy’

    andrew,
    i dont know all the answers, and i do have a lot of questions,
    but one thing i dont want is to be confused for a self assured know-all,
    how about you?

  25. smiths
    July 30th, 2008 at 16:20 | #25

    what about some gold coins or silver andrew?

  26. FDB
    July 30th, 2008 at 16:27 | #26

    Peter – if the growing, picking, drying, storage, roasting, re-storage and grinding could all be perfectly controlled, a machine could easily be designed to do it.

    A good barista can respond dynamically to slight variations in the consistency and chemical constitution of the coffee, judging by colour, texture, crema appearance, sound (once you know the machine) – all kinds of things.

    A chump, however, will do things like burn the milk, overextract the coffee, over- or under-tamp the coffee in the ‘group’ (thing what you screw in full of coffee above the cup), not clean the parts regularly.

    I’m sure a machine could easily be designed to sit at about the median level of quality though. I’m not sure why it is that horrid shit comes out of every automatic machine I’ve ever used.

  27. July 30th, 2008 at 16:27 | #27

    I just got an email today which had the following to say about the success of Starbucks, obviously in America :

    Starbucks is great at operations research. It wouldn’t have become the company it is today if it hadn’t created detailed manuals telling people how best to assemble the various chemicals that make up a modern adult milk shake. All of those independent coffee shops that have a nostalgic fixation on grinding the coffee beans right before using them, claiming this “ tastes better ” — these poor shops go out of business left and right, because they don’t have the right system. They make only a handful of drinks in the time it takes Starbucks to serve a hundred.

    I just thought the juxtaposition of these two things was funny, even if there’s nothing surprising about it.

    To me, it doesn’t matter how you make coffee : I’ve never had one I could finish.

  28. July 30th, 2008 at 17:26 | #28

    smiths,
    You seem very assured in the belief that we are all ruined, the system is collapsing and that it will be replaced. Very self-assured. All I have done is to ask you to justify that position, a justification you have consistently failed to supply.
    If asking you to justfy your position makes me the “…self assured know-all…” then I would have to do two things:
    1. Cry “guilty”; and
    2. Re-examine my understanding of the English language.
    .
    On the question of gold or silver coins, smiths, I remain to be convinced. The current system, while ugly, seems to be working and has the benefit of flexibility.
    Voters seem to now understand that debasement of the currency by resort to the printing press only hurts everyone, so, while voters have a strong say in it (and I both hope and believe this situation will continue) I think it works well enough to not justify the (rather high) costs of any change.

  29. observa
    July 30th, 2008 at 17:55 | #29

    “I would like to point out observa you can’t eat gold, drive it to the corner store or drink it in the morning.”
    Can’t do that with those irredeemable dollars in the bank at present either, but I’m happy to leave most of them there. A quarter of the readies is in gold warrants now and they don’t earn interest naturally. Just a bit of hedging against complete monetary disaster. Trouble is I can’t spend the IOUs coming in fast enough since I’m debt free, so where to put it other than that 7% call at present eh? I figure cash is king for the next 12 months or so and who wants term deposits with interest rates rising? Be interesting to see which medium buys more coffees in 12 months time of course.

    Actually Andrew, with Westpac paying 7.05% and their corresponding mortgage rate at 9.67%, I’d guess that’s the lowest spread the banks have had for many a year. Probably explains the decimation of the NBFI sector in the mortgage market currently, because investors like me won’t touch anything but Swanees 4 pillar pets now.

  30. smiths
    July 30th, 2008 at 18:22 | #30

    the problem as i see it is this andrew,

    if you look at the world financial system currently,
    all the evidence suggests that it is not working,

    therefore your counterfactual arguement that it is, is surely the one that needs justifying,
    hopefully with copious amounts of analysis and some graphs just for kicks

  31. July 30th, 2008 at 18:34 | #31

    smiths,
    I have been working in and around that system for nearly two decades – starting with the prosecution of a failed “bank”, moving on to working in investment banks, switching to retail, then into consulting and now purely as a user of the services. I look at that system daily – often many times a day.
    I like to think I know it as well as almost anyone.
    Like any system it has its flaws and mistakes are made. I see no evidence that, taken as a whole it is “not working”.
    In any case – I am not asking for any evidence that it is, or is not, working. I am asking you to say where you want to get to. So far all I have got from you is criticism of the system and a few woolly worded statements about what you would like to see it replaced with.
    So far, you have provided no real idea of how you would replace the system you see as having failed. Until you can do that you will remain someone carping on the sidelines – but definately not relevant to the argument.

  32. Ian Gould
    July 30th, 2008 at 19:05 | #32

    “if you look at the world financial system currently,
    all the evidence suggests that it is not working,”

    What evidence would that be?

    How does the current “evidence” differ from every other recession or speculative panic of the past century?

  33. July 30th, 2008 at 19:18 | #33

    Starbucks (an incredibly successful franchise by anybody’s standards, also an incredibly successful branding of a product by anybody’s standards) was notable for a few things, including:

    Mediocre coffee.

    Financial failure of the retail business model (if indeed that is the problem) must be blamed on more than crap coffee.

    Despite all the circle jerking about how refined is the Ozzi “coffee culture”, this culture (cheifly faux bohemian/faux european decor) has developed without quality coffee being necessary.

    Indeed, with rare but notable exception, barista incompetence, and inconsistency of quality between cafes has been the watermark running through Ozzi coffee culture.

    “The MacDonalds of Coffee” is often said about Starbucks. This is a deserved epithet, though unfair to MacDonalds. MacDonalds, guilty of serving their product with junior staff, do NOT hand customers a number (without any explanation) and put the onus onto the customer to later find their way to the servery window & claim their purchase.

    MacDonalds DO smile, Do treat customers like they are a VIP, DO have staff who possess a thorough knowledge of the product, DO keep their premises spotless, DO explain in a concise polite friendly manner their customer service process, and they DO NOT offer hamburgers in 65 jellybean-ish flavours.

    Just saying.

  34. FDB
    July 30th, 2008 at 20:17 | #34

    I find myself in rare and complete agreement with you, SATP.

  35. pablo
    July 30th, 2008 at 22:28 | #35

    My Starbucks offered a $1.20 ($2.70 Saturdays) newspaper for 50 cents extra. Got me in but if hard copy newspapers are going out of fashion then I guess it wasn’t such a good sales gimmick.

  36. melanie
    July 30th, 2008 at 23:21 | #36

    I was all for the Oz coffee culture explanation until I read this from the Christian Science Monitor: http://www.csmonitor.com/2008/0730/p09s02-coop.html

    Starbucks is in trouble in the US too! Apparently a starbucks coffee was once a status symbol, but no longer. Probably it boils down to an improvement in the US coffee culture. Or else it means only status conscious people worry about the quality of their coffee (as distinct from just the quantity of caffeine?).

  37. PeterRickwood
    July 31st, 2008 at 09:24 | #37

    FDB said:


    A good barista can respond dynamically to slight variations in the consistency and chemical constitution of the coffee, judging by colour, texture, crema appearance, sound (once you know the machine) – all kinds of things.

    I find it hard to believe that a machine could not respond to the same changes, and do a better job than most people. I suspect that even if such a machine did exist, most people dislike the thought of a machine prepared coffee. I would like to see some blind taste test studies on human vs. machine prepared coffee, if only they could produce a machine that produced reasonable coffee — my experience, like yours, is that the stuff that comes out of those fully automatic machines is awful… watery, weak, and wholly unsatisfying.


    I’m sure a machine could easily be designed to sit at about the median level of quality though. I’m not sure why it is that horrid shit comes out of every automatic machine I’ve ever used.

    Completely agree. Still don’t understand why it has to be that way.

  38. observa
    July 31st, 2008 at 09:34 | #38

    “How does the current “evidenceâ€? differ from every other recession or speculative panic of the past century?”

    Firstly Ian booms and busts are inherently credit expansion followed by credit contraction so the nature of the boom and subsequent malinvestments to be liquidated, depends largely on the length and depth of the credit creation that preceded it. That’s what makes this bust of 1930s proportions I’d suggest. As developed countries revelled in the luxury of rising asset prices as income(something for nothing) and its trappings of the cafe-latte/financial intermediation/service economy, its real economy was being hollowed out by those who were ordered to do so. Here’s the evidence of that now-
    http://environment.newscientist.com/channel/earth/climate-change/dn14412-33-of-chinas-carbon-footprint-blamed-on-exports.html?feedId=climate-change_rss20
    not to mention the Starbucks and Dons Smallgoods writing on the wall too you’ll notice. How many tranches of 600+ jobs going and their downward multipliers will it take before that feeds back to Asian tigers and their consequent demand for resources we may well ask ourselves now. That’s exactly what the markets are very jittery about and they have every right to be. By any rational assessment, the developing nations should have been absorbing real savings and investment from the developed(and aging)world the last decade or so, but by a curious aligning of the planets that wasn’t the case. That very deep ponzi scheme sucking in Asian savers for so long is about to collapse, so make sure you are well seated now.

  39. observa
    July 31st, 2008 at 11:05 | #39

    Here’s the problem at sherriff headquarters in a nutshell from the Mogambo Guru-

    Gary North in his Reality Check newsletter at garynorth.com wrote, “Americans would regard the son’s inheritance of a father’s debt as tyrannical. But, with the help of Congress, Americans have adopted the same system, but on a far larger scale. We have passed our IOUs on to the children of our neighbors’ children.”

    “Today, the Treasury sells its IOUs to foreign investors, especially foreign central banks. Something in the range of 40% of the on-budget Federal debt of $9 trillion is held by foreigners.”

    Bill Bonner here at The Daily Reckoning writing, “Today, fully 21% of Russia’s monetary reserves are invested in the obligations of Fannie, Freddie and the Home Loan Banks. And the largest holder of Fannie and Freddie debt is another friendly foreigner, China”, which he says, “owns $376 billion worth of US agency bonds. Altogether, foreigners hold $1.3 trillion of them.”

    And as Mogambo points out-
    In fact, it is said that purchases of Fannie/Freddie debt by foreigners covered a third of the US current account deficit of $700 billion over the last year!

    Richard Fisher, the head of the Dallas Federal Reserve Bank, who said, “Add together the unfunded liabilities from Medicare and Social Security, and it comes to $99.2 trillion over the infinite horizon.”
    “Traditional Medicare composes about 69%, the new drug benefit roughly 17% and Social Security the remaining 14%.”

    [Notice that drug benefit liability exceeds that of social security now and all of this when GDP of the US is around $13 trillion]

    Richard Fisher again-
    “We know from centuries of evidence in countless economies, from ancient Rome to today’s Zimbabwe, that running the printing press to pay off today’s bills leads to much worse problems later on. The inflation that results from the flood of money into the economy turns out to be far worse than the fiscal pain those countries hoped to avoid”,
    “Purging rampant inflation and a debased currency requires administering a harsh medicine. Even the perception that the Fed is pursuing a cheap-money strategy to accommodate fiscal burdens, should it take root, is a paramount risk to the long-term welfare of the US economy. The Federal Reserve will never let this happen. It is not an option. Ever. Period.”

    To which we ask ourselves when? Sometime, somehow, an awful lot of coffees have to be forgone by somebody and perhaps Starbucks understands that imperative now.

  40. smiths
    July 31st, 2008 at 13:03 | #40

    andrew, forget it

    i cant be bothered, please invest as much of your personal wealth in banking shares as you can manage,

    i hope it works out well for you

  41. wilful
    July 31st, 2008 at 13:09 | #41

    The only people I see in Starbucks in Melbourne are international students. Fair enough, no surprise they don’t know any better. But not a great customer base for a high-cost business.

  42. O6
    July 31st, 2008 at 13:18 | #42

    Observa, I read your Ron Paul reference and was thinking, ‘yes indeed,’ until I got to “The central banks of the world secretly collude to centrally plan the world economy. I’m convinced that agreements among central banks to “monetizeâ€? U.S. debt these past 15 years have existed, although secretly and out of the reach of any oversight of anyone – especially the U.S. Congress that doesn’t care, or just flat doesn’t understand.”
    Not too keen on conspiracy theories, though one is almost required to explain bad machine coffee. Qantas Club is particularly disappointing; Q could afford good coffee and a clean machine in the days before its planes started to fall to bits in midair. That’s all that should be needed for a good espresso; milk’s harder to automate.

  43. July 31st, 2008 at 14:17 | #43

    I find it hard to believe that a machine could not respond to the same changes, and do a better job than most people.

    Well they probably can make better coffee than ‘most people’ but really good coffee isn’t made by most people. It’s made, as FDB pointed out, by skilled individuals with well-developed taste and skills, who know how to respond to the subtle range of variables that presents themselves. It’s not heart surgery but its not widget making either.

    What an automated machine represents is a company that’s unwilling to train its workers to this level of expertise or hire people that already have the skills. It’s not a good place to start from.

    I’d really recommend heading off to a barista course – great way to understand what’s what with coffee. And if you’re lucky, there’ll be ‘cupping’

  44. July 31st, 2008 at 14:19 | #44

    And, as someone pointed out somewhere, Starbucks secret was that they found out how to make coffee fattening.

  45. observa
    July 31st, 2008 at 14:44 | #45

    Yeah 06, he probably drifts out there a bit with the central planning central bankers’ conspiracy bit but I’d cut him a bit of poetic licence there for the real message. In one sense he’s right that central bankers will have a tendency to cover their backsides generally and there’s no doubt some have been manipulating their currencies for some perceived end game. That would be Ron Paul’s objection generally, that they know not what they do in the long run and their long run is no doubt upon us all now.

  46. derrida derider
    July 31st, 2008 at 14:51 | #46

    “If the coming tax review could get rid of payroll tax, it would be a huge boon.”

    OT, but wouldn’t it be better to remove the exemption for small employers rather than remove the tax (or, rather, replace it with some other tax which may or may not be a good one)?

  47. Ian Gould
    July 31st, 2008 at 14:56 | #47

    “…Dons Smallgoods…”

    Yes, a company buying the two largest smallgoods companies in Australia and then rationalising their work force is a clear sign of imminent global economic collapse.

  48. Ian Gould
    July 31st, 2008 at 15:25 | #48

    “Firstly Ian booms and busts are inherently credit expansion followed by credit contraction so the nature of the boom and subsequent malinvestments to be liquidated, depends largely on the length and depth of the credit creation that preceded it.”

    What percentage of world output does the current credit represent and how does that compare with prior credit expansions prior to recessions?

    “As developed countries revelled in the luxury of rising asset prices as income(something for nothing) and its trappings of the cafe-latte/financial intermediation/service economy, its real economy was being hollowed out by those who were ordered to do so.;

    Yes the vicious evil western Greens used their dictatorial power over the poor defenseless Chinese to force them to industrialise when really they LIKED eating once a day (if they were lucky).

    Incidentally how does the boom in Chinese exports to other developing countries fit into the latest iteration of your eschatological visions?

  49. Ian Gould
    July 31st, 2008 at 15:27 | #49

    “….the developing nations should have been absorbing real savings and investment from the developed(and aging)world the last decade or so, but by a curious aligning of the planets that wasn’t the case.”

    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?

  50. FDB
    July 31st, 2008 at 15:43 | #50

    Further to Anthony’s points (and ignoring for the moment that a very good non-automated machine is very expensive anyway):

    I’m sure you could build a machine to replace a very good barista, but it would cost a shitload to design, build and maintain.

    It would be a VERY sophisticated bit of kit – like you’d usually only find in research labs or large-scale value-adding industry.

    Which does lead me to question why there isn’t an iced coffee on the market made with even half-decent coffee. That might, on a big enough scale, be a worthwhile application for a barista-bot.

  51. Ian Gould
    July 31st, 2008 at 17:20 | #51

    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.

  52. observa
    July 31st, 2008 at 17:23 | #52

    “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.

  53. Ian Gould
    July 31st, 2008 at 17:26 | #53

    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

  54. Ian Gould
    July 31st, 2008 at 17:58 | #54

    “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.

  55. smiths
    July 31st, 2008 at 19:01 | #55

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

  56. July 31st, 2008 at 19:59 | #56

    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?

  57. Ian Gould
    July 31st, 2008 at 21:14 | #57

    “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?

  58. Ian Gould
    July 31st, 2008 at 21:26 | #58

    “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.

  59. Ian Gould
    July 31st, 2008 at 21:48 | #59

    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.

  60. Ian Gould
    July 31st, 2008 at 22:28 | #60

    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%.”

  61. observa
    August 1st, 2008 at 02:05 | #61

    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.

  62. Ian Gould
    August 1st, 2008 at 10:41 | #62

    “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.

  63. Ian Gould
    August 1st, 2008 at 10:56 | #63

    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.

  64. Ian Gould
    August 1st, 2008 at 11:08 | #64

    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.

  65. observa
    August 1st, 2008 at 11:18 | #65

    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.

  66. observa
    August 1st, 2008 at 11:42 | #66

    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

  67. smiths
    August 1st, 2008 at 13:48 | #67

    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

  68. smiths
    August 1st, 2008 at 13:49 | #68

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

  69. Ian Gould
    August 1st, 2008 at 22:09 | #69

    “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.

  70. observa
    August 2nd, 2008 at 10:14 | #70

    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.

  71. observa
    August 2nd, 2008 at 10:39 | #71

    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.

  72. Ian Gould
    August 2nd, 2008 at 10:42 | #72

    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.

  73. smiths
    August 4th, 2008 at 10:29 | #73

    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.

  74. Stephen L
    August 4th, 2008 at 14:00 | #74

    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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