Of Coffee and Capitalism

Posted January 5, 2008

Categories: Articles

Behind every great economic bubble lies what former Federal Reserve chairman Alan Greenspan once called “irrational exuberance.” Greenspan had in mind the tendency of people to pay more and more for the same thing: a tulip, real estate in the South Seas, a share in Widget.com, a one-bedroom apartment in downtown DC. This exuberance isn’t connected to the use of the object in question but its subsequent resale at a higher price. Participants in the spiral of escalating prices become positively giddy. I imagine that bank robbers feel similarly exuberant after they’ve disabled the alarm system and are inside the vault stuffing their duffel bags with loot.

In the latest financial crisis, however, the banks and financial institutions themselves became infected with giddiness. They were the ones to disable all the alarm systems and firewalls (remember Glass–Steagall anyone?). They were the ones to loot the accounts in a classic inside job — except this time instead of one crooked employee, the whole financial system was in on the deal. Rather than safecracking tools, they used more sophisticated instruments: derivatives, mortgage-backed securities, collateralized mortgage obligations. Irrational exuberance was just plain greed.

Ever since the subprime mortgage crisis hit, the rationally unexuberant have been predicting what economists delicately call a “market correction.” One sign of this correction came in July when Starbucks, the ubiquitous coffee chain, announced that it would close 600 U.S. stores. Talk about bursting bubbles. Since it began in 1971 in Seattle, Starbucks grew at such a remarkable rate in the 1990s that it boasted six new stores somewhere on the planet every day. The chain tried to put a smiley face on the decision to close 5% of its U.S. stories by announcing that it would be focusing on international expansion. However, given that many of closed stories were in states hardest hit by the real estate and credit crises — Florida, California — the executive decision was connected more to troubles in the U.S. economy than opportunities abroad.

I’m wondering if there is a closer link between coffee and bubble economies. First off, I must confess that every time I have a venti mocha frappucino, I feel a wave of irrational exuberance wash over me. I can just see those large plastic cups by the elbows of the managers of the hedge and private equity funds (the 50 most exuberant of which earned a certifiably irrational $588 million each in compensation last year).

The rise of Starbucks also seems to correspond with the expansion of the go-go economy. We used to pay spare change for a cup of coffee. At some point in the 1980s, we decided to go into credit card debt to buy essentially the same thing. Okay, the coffee was better, but those lattes were some seriously leveraged beverages. The profit margins were killer, and Starbucks expanded accordingly.

So, too, has Starbucks become a major player in globalization. As Foreign Policy In Focus (FPIF) contributor Kim Fellner describes in Starbucks v. Ethiopia, the coffee giant’s growth has become more and more connected to global markets. “By 2006 Starbucks was certainly a global player. Though Schultz originally conceived of the company as a vehicle to import coffeehouse culture to the United States, he soon discovered he could export his own version back to Europe and to anywhere else in the world that seemed ready for the Starbucks coffee experience,” Fellner writes in this excerpt from her new book Wrestling with Starbucks. “As he told his shareholders at the 2006 annual meeting, ‘In 1996, we began to dream we could be an international business’; and that same year the company opened its first overseas store, in Tokyo. By 1999 Starbucks was solidifying its presence in Britain and aiming to have 500 European stores by the end of 2003. By early 2006, Starbucks had more than 3,000 company-owned and licensed stores outside the United States in 37 countries. Its feet were firmly planted in China, its toes testing the market in Brazil, its eyes turned toward India.”

If we go back to the very origins of speculative bubbles, coffee seems to be near at hand. It does seem rather suspicious that the Dutch first began drinking coffee in the early 17th century — they brought the first coffee plant to Europe in 1616 — just around the time they were becoming manic about tulips. As more and more caffeine circulated through the Dutch system, they created a number of financial instruments — such as the first futures market — to sell the beautiful new varieties of tulips. Tulipmania, the first modern speculative bubble, collapsed in 1637. Coffee was just beginning to take over Europe.

Not convinced yet of the link between coffee and speculative bubbles? Here’s one last connection. The day after a bubble economy bursts feels a lot like the day after you decide to kick that four-latte-a-day habit. Irrational exuberance is just a memory. All you have left is one whopper of a headache.

The War Bubble

During the current economic tailspin, one group of economic actors at least seems to be upping its caffeine consumption and maintaining high levels of exuberance. The defense sector is enjoying unprecedented growth, thanks to the Pentagon’s bubble budget. Want a guide to popping this bubble? There’s no better plan for transforming the military budget than FPIF’s Unified Security Budget, produced by FPIF’s Miriam Pemberton, Lawrence Korb, and a task force of security experts. With the war in Iraq and Washington bailing out Wall Street, the USB’s detailed recommendations on how to cut the military budget are more urgently needed than ever before.

The Pentagon’s bubble is not simply for domestic consumption. Like Starbucks, the U.S. government wants to spread its exuberance around the world. As FPIF columnist Frida Berrigan writes in No Recession for Arms Sales, “U.S. weapons sales to foreign countries in 2008 are on track to be 45% higher than in 2007. This year, the United States will offer about $34 billion in weapons to Iraq, Pakistan, Saudi Arabia and other countries. In 2007 that figure was $23.3 billion, just a small bump from the $21 billion of 2006.” Investors who care little about what their funds ultimately buy will find war an enviable investment at the moment. Consider the fabulous stroke of luck in Pakistan. The United States is flooding the country with weapons. It is spending huge amounts on fielding forces that are conducting raids inside Pakistan — without prior approval from Islamabad — to go after the Taliban and al-Qaeda. And Pakistan is now confronting these U.S. forces in defense of its own sovereignty. U.S. weapons against U.S. weapons: only defense contractors could be exuberant in such a looking-glass universe.

Meanwhile, as FPIF contributor Mustafa Qadri reports in Pakistan’s Anti-Muslim Taliban, sympathy for the Taliban remains strong at the grassroots level in Pakistan. “Without adequate political leadership, eradicating sympathy for the Taliban may prove more difficult than eradicating their hideouts in frontier Pakistan,” he writes. “But so long as NATO and the United States continue unilateral strikes in Pakistan that kill civilians, the real battle — for hearts and minds — will be lost.”

Alas, according to FPIF contributor Doug Bandow neither U.S. presidential candidate appears ready to burst the war bubble. “Washington is filled with the mantra of ‘change,’ as both the Obama and the McCain campaigns vie for support,” he writes in Bring Them Home…from Asia. “But both major political parties represent a status quo in which the United States must forever remain dominant everywhere, subsidizing prosperous and populous allies, occupying and transforming failed states, and micromanaging world affairs. Other than disagreeing over policy toward Iraq, Barack Obama and John McCain are marching in geopolitical lockstep. There are, of course, many foreign policy issues over which reasonable people can reasonably disagree. But the disappearance of any need to defend countries that have grown wealthy while their potential enemies have dissipated is not one of them. It’s time to let America’s Cold War commitments, especially those in Asia, just fade away.”

Meanwhile, in Latin America

Well, at least Latin America is peaceful. Oops, maybe not.

In September, the United States and Venezuela broke off diplomatic relations as they expelled each other’s ambassadors. Venezuela’s Hugo Chavez routinely lashes out against the sulfuric U.S. president. And Washington is fighting back with more than just rhetoric. “Washington announced plans this May to open a military base in the Guajira region of Colombia, a territorial expanse straddling the Venezuelan border,” writes FPIF contributor Michael Busch in Bush and Chávez. “The move sounded alarm bells in Caracas, prompting Chávez to angrily proclaim that Venezuela ‘will not allow the Colombian government to give La Guajira to the empire.’ In response, the United States resorted to gunboat diplomacy, reactivating its Caribbean Fourth Fleet, a unit that was previously disbanded in 1950. Upping the ante still further, the American government added a nuclear-powered aircraft carrier to the fleet’s roster, specifically commissioned to patrol the northern coast of South America.”

That’s not the end of U.S. intervention in Latin America. As FPIF senior analyst Stephen Zunes writes in The United States and Bolivia, Washington is intervening on the side of the wealthier eastern section in its efforts to secede from the country. Bolivia has expelled the U.S. ambassador for meeting with the rebellious opposition. But the meddling goes back further than that. “U.S. subversion has assumed several forms since the leftist indigenous leader became president in 2005,” Zunes writes. “For example, the U.S. embassy — in violation of American law — repeatedly asked Peace Corps volunteers, as well as an American Fulbright scholar, to engage in espionage.”

Both Bolivian leader Evo Morales and Hugo Chavez have turned elsewhere for allies. Morales went to Iran this month to boost trade and energy cooperation. Chavez once had an ally in London’s former mayor, Ken Livingstone, who negotiated a deal in which Venezuela would provide London with subsidized oil, which in turn would translate into cheaper bus fares for poor Londoners. As FPIF contributor Binoy Kampmark writes in Boris and Hugo, the deal’s off: “It was, at first blush, an odd affair between curiously mismatched lovers: one of the world’s largest cities paired with one of the poorer ones. The seemingly unbalanced relationship between London and Caracas has been terminated. The instigator of the annulment was London’s new mayor, the previously deemed unelectable Boris Johnson. Some seven million British pounds will be returned to the Venezuelan government in due course.”

Another deal that until recently seemed to be off was the U.S. free trade agreement with Colombia. Over the summer, congressional rejection of fast-track trade authority for the U.S. president killed the pact. But since there was no formal vote on the deal itself, the agreement could rise once again from its coffin. The Colombian government is pushing hard for just that. “Even if their effort to get the Colombian accord onto the agenda for the end of this year fails — again, regardless of who wins the White House — they will push hard for the new Congress to vote, and vote the right way, on it early next year,” writes FPIF contributor Phillip Cryan in Labor and the Colombia Free Trade Agreement. “The Colombian government has spent millions of dollars on the effort already; there’s no reason to spare expense, in lobbying and public relations, now. And they seem to think they still have a good chance of success, with a number of Democrats ready to vote in favor of the pact.”

Of Poems and Pests

Malaria kills one million children under the age of five each year in sub-Saharan Africa. That’s one every 30 seconds. President George W. Bush has signed into law a new initiative designed to reduce malaria in 15 African countries by 50% through drugs, nets, and insecticides. FPIF contributor Joseph Kaifala doesn’t think this initiative goes far enough.

“Perhaps we can end the vicious cycle of malaria by concentrating aid on helping sub-Saharan African countries to establish efficient waste-disposal mechanisms and expediting the achievement of goal seven of the Millennium Development Goals, which calls for a significant improvement in the lives of at least 100 million slum-dwellers by 2020,” he writes in Malaria and the Limits of Good Intentions. “As the Liberian saying goes, unless the rotten tooth is removed, the mouth must chew with caution — even when painkillers are abundant.”

A pest of a different sort is leaving Chad. Writes FPIF contributor Daphne Wysham in The World Bank Takes the Money and Runs from Chad, “The World Bank got involved in a major financing project in Chad a decade ago. Sadly, instead of supporting a population that’s largely illiterate and dependent on agriculture for its survival, the Bank had decided to take on a project that would bring oil wealth — and little in the way of jobs, schooling or health care — to this desperately poor and highly corrupt country. Civil society groups from around the world warned against the potentially negative repercussions of a rapid infusion of petro-capital into a war-torn nation ruled by a dictator and an ineffective public sector.” And now the World Bank has finally taken this advice and, rather late in the game, withdrawn financing for the Chad-Cameroon pipeline. What kind of coffee were those Bank officials drinking?

Finally, as part of our Fiesta! feature, FPIF poetry editor Melissa Tuckey interviews the fabulous poet Naomi Shihab Nye. “As my father kept saying toward the end of his life,” Nye says about the Israel-Palestine conflict, “people will have to become exhausted enough with fighting to embrace peace. From what I hear, many on both ‘sides’ have been exhausted enough to try something better for quite a long time. My hopes are for a one-state cooperative solution (because the territory is simply so small) in which Palestinian and Israeli citizens may share their strengths and resources in mutual respect. I don’t see, at this point, how a two-state solution could work as well. The wall must go down. Don’t bring it to Texas, either, we have enough problems with our own stupid wall!”

FPIF, September 23, 2008

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