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Extra10/22/2008 12:01 AM ET

The Starbucks recession indicator

Want to know how bad a country's economic downturn will be? Add up the number of outlets serving grande lattes.

By Dan Gross,

Remember Thomas Friedman's McDonald's theory of international relations?

The thinking was that if two countries had evolved into prosperous, mass-consumer societies, with middle classes able to afford Big Macs, they would generally find peaceful means of adjudicating disputes. They'd sit down over a Happy Meal to resolve issues rather than use mortars.

The recent unpleasantries between Israel and Lebanon, which both have McDonald's operations, put paid to that reasoning. But the Golden Arches theory of realpolitik was good while it lasted.

In the same spirit, I propose the Starbucks theory of international economics. The higher the concentration of expensive, nautically themed, faux-Italian-branded Frappuccino joints in a country's financial capital, the more likely the country is to have suffered catastrophic financial losses.

It may sound doppio, but work with me.

The current crisis has its roots in the unhappy coupling of a frenzied nationwide real-estate market centered in California, Las Vegas and Florida, plus a nationwide credit mania centered in New York. If you could pick one brand name to personify these twin bubbles, it's Starbucks (SBUX, news, msgs).

The Seattle coffee chain followed new housing developments into the suburbs and exurbs, where its outlets became pit stops for real-estate brokers and their clients. It also carpet-bombed the business districts of large cities, especially the financial centers, with nearly 200 in Manhattan alone.

Starbucks' frothy treats provided the fuel for the boom, the caffeine that enabled deal jockeys to stay up till all hours putting together offering papers for CDOs and helped mortgage brokers work overtime processing dubious loan documents. Starbucks strategically located many of its outlets on the ground floors of big investment banks. (The one around the corner from the former Bear Stearns headquarters has already closed.)

Like American capitalism, Starbucks, fueled by the capital markets, took a great idea too far (high-quality coffee for Starbucks, securitization for Wall Street) and diluted the experience unnecessarily (subprime food like egg-and-sausage sandwiches for Starbucks, subprime loans for Wall Street).

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Like so many sadder but wiser Miami condo developers, Starbucks operated on a "build it and they will come" philosophy. Like many of the humiliated Wall Street corporations, the coffee company let algorithms and number-crunching get the better of sound judgment: If the waiting time at one Starbucks was more than a certain number of minutes, Starbucks reasoned that an opposite corner could sustain a new outlet. Like the housing market, Starbucks peaked in spring 2006 and has since fallen precipitously.

America's financial crisis has gone global in the past month. European and Asian governments, which until recently were rejoicing over America's financial downfall, have had to nationalize banks and expand depositors' insurance. Why? Many of their banks feasted on American subprime debt and took shoddy risk-management cues from their American cousins.

Indeed, the countries whose financial sectors were most connected to the U.S.-dominated global financial system, the ones whose financial institutions plunged into CDOs, credit-default swaps and the whole catalog of horribles have suffered the most.

What does this have to do with the price of coffee?

Well, when you start poking around Starbucks' international store locator, some interesting patterns emerge.

Continued: Highly caffeinated capitalism

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