After the US government shutdown of 2018-2019 witheld two paychecks from 800,000 federal workers and countless more contractors and businesses, and with US officials encouraging furloughed employees to simply take out loans, we've got debt on the mind again. Citizens of the US and UK are experiencing record high levels of debt concurrent with falling wages, and higher costs of living. But the financial systems that enable these vicious debt spirals play out on the world stage, as private companies and wealthy governments alike employ innovative strategies for ensnaring vulnerable countries, companies, and individuals in inescapable economic webs. Vulture funds play an important role here, but we also want to understand how the opportunities for vulture funds open in the first place. Will we finally solve the global debt crisis, or will the hole get deeper and deeper?
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(Thank you to Alexey Gladyshev for editing this transcript for us!)
[0:06] I'm David Torcivia.
[0:08] Daniel Forkner.
[0:09] And this is Ashes Ashes, a show about systemic issues, cracks in civilization, collapse of the environment, and if we're unlucky, the end of the world.
[0:19] But if we learn from all of this, maybe we can stop that. The world might be broken, but it doesn't have to be. Debt On The Mind [0:34] David, we just got done with the longest United States government shutdown in history, although it's only temporary at this time, there still a chance that the shutdown will be back on around February 15th. But you know, I was thinking about this whole situation, how, you know, 800,000 federal employees went without pay or two pay periods, and then countless many more contractors that simply went without pay and will not be reimbursed, in addition to the numerous businesses that serve federal employees that had to cut back on Services. And we had a US official claim during this whole crisis, “Hey, if you're furloughed federal employee — just take out a loan!” You know, no problem! And of course he got a lot of flack for that. But he got us thinking about debt again and maybe this is a time to revisit the concept of debt, something we covered pretty conceptually in episode 28 “Debt End”.
[1:32] Maybe my favorite episode so far.
[1:34] Yes, one of mine as well. So why don't we just talk about some of the real-world consequences of the concepts that we discussed in that episode. And starting of course with these federal employees and consumers in the US and other countries as well.
[1:50] That sounds like a good idea, Daniel. And I think any time we come up with this topic of debt what we're really talking about in the impacts that it have is the interest that is placed on the debt. And that's the critical component of this story where it starts with these furloughed employees. Now, there were a lot of people who were having trouble making ends meet, they were missing all these paydays, these paychecks that should come, so they could pay their mortgage, their car payments — all these things, these debts they need to service battered too various other institutions and individuals. As we discussed before in this show, many people just don't have the savings, especially in the United States to deal with what is basically an unprecedented emergency. Something like forty percent of Americans have less than $400 ready for these types of things. So you can see very quickly how this would get out of hand. And you mentioned, Daniel, that the government suggested people just take out loans to make up the shortfall like that something very simple and easy to do. We started looking at some numbers of these loans and that's where things start getting interesting.
[2:49] Right, there were a number of institutions, credit unions, banks that came out and said, ¨Hey, we're going to offer 0% interest loans for federal employees.¨ But it was completely voluntary, there was no single source federal option for these employees, and websites were set up to help people identify all the institutions in their states that were offering loan assistance. But the loans offered varied wildly: if you looked at the District of Columbia for example, the capital of the United States where probably there's the highest concentration of federal workers, the American Airlines Credit Union was offering 1% interest loans, the Department of Commerce Federal Credit Union was offering a two-year loan of up to $5,000 but with an 8.99% interest rate. The Department of Labor FCU was offering one-year loans at 0% interest for the first 60 days but then that hiked up to 5% for the remainder of the term.
[3:49] And this story continued with just about every state that you looked at, there seem to be no rhyme or reason to how these loans were priced or whether they were available at all. And that's a big problem too, the availability of these loans: if you were lucky enough to live in a city center, which means you're probably more well off anyway, well, then you had a lot of options available for you to service these debts, 0% or extremely low interest loans. But if you were a federal employee that lived in a rural area where your rate of pay was probably lower, you also had much fewer options to find loans to service these debts.
[4:24] That's true. And because of that reason a lot of people ended up turning to predatory loans, the type of short-term consumer loans offered by like Payday, retail stores that are supposed to help people get from paycheck to paycheck. But these come with exorbitant interest rates, over 30%, 40%, 50% when you start tallying up all the fees. And although we do not know how many people had to turn to these services, there was clearly a lot of value that was added to these companies. We looked at the stock value of just three publicly traded companies that own pawn stores, money lending services and things that would have catered to people needing short-term loans. One of these was EZCorp., its stock price was just $7.70 on December 21st, one day before the shutdown, and it reached a high of $9.39 on January 25th, the last day of the shutdown, which represented a 22% hike in equity value.
[5:25] First Cash, Inc. on the first day before the shutdown was at a 1-year low and it stock at $68. But as soon as the shutdown started that climbed up to $85 by the time to shut down ended. That’s the gain of 25%.
[5:39] Another one, World Acceptance Corporation jumped 23%. And these equities are not perfect representations of the additional value they would have received from payday loans. EZCorp., for example, owned pawn shops across the United States and Latin America with loans in just one of the services they offer; First Cash similarly is an owner of pawn shops, jewelry pawn brokers and other similar retail loan combination stores; and World Acceptance Corporation owns many of these loan stores in the US and Mexico. So the fact that they gain so much value just from this very limited economic event shows that investors expected so many people to turn to their services, and of course that means many people are probably still feeling the effects of that shutdown as they struggle to repay these loans that they had to take out.
[6:29] And while this shutdown is over, at least for now, the economic fallout from this event is going to continue for months and maybe years into the future. We’ll see this both in GDP numbers, the immediate spending for this quarter, as well as the precariousness of many individuals who were caught up in this. But it's not just the economic impact, immediately in terms of lost wages or these loans were taken out, but also loss in talent. Air traffic controllers are one of the major areas of focus during the shutdown as we saw with many airport shutdowns and the threat of transportation strikes. But it's not just these veteran air traffic controllers that were affected. While many of those did ultimately resign, there's a large class of air traffic controllers who have just gotten out of their lengthy intense training that goes on for months and years, and then they're in this very introductory period of their career and find that they cannot pay their bills, they don't have the savings that these older, more established air traffic controllers do. And huge amounts of these people resigned, they will no longer be working in this industry, and that is a terrible situation for the future of air traffic control and ultimately air traffic congestion, and the wait times that we'll all have to face in our airports, and the economic fallout from that. You can see very quickly how something that seems simple, “Oh, we're going to shut down the government and it's only going to affect these government workers and that'll be it, once we’ll pay them back, well, it’s over, that's fine.” But this very quickly gets out of control and debt spirals. And that's a concept that we’ll keep coming back to you throughout this episode.
[7:58] Right, and like you alluded to, it's not just these federal workers who who have to turn towards credit to make ends meet, you mentioned, you know, 40% of the United States population doesn't have $400 to spare. So as a result we've seen consumer debt rise to record levels. Student debt is at insane levels right now, medical debt is so high it's a number one cause of bankruptcy in America even among people with insurance. Side note: congratulations to healthcare insurance companies who have figured out how to game the system on that. So these trends are, you know of course, unsustainable and at a certain point the camel's back will break. Hopefully, it will come from the American people themselves saying, “We've had enough,” and start demanding an end to these private health insurance companies and end to student debt, demanding companies actually pay livable wages, you know, as supposed to the alternative, which would be, I don't know, wide-scale financial collapse as the billionaires take all their accumulated wealth to New Zealand or something like that. And before you say, “Well, hold on David, hold on Daniel, those billionaires — they earn their money, they worked hard for it. And yes, we as people are suffering, we have to take on more debt just to keep up with our rising cost of living and our falling wages, but if this economy is going to improve, if we're going to turn this ship around, we need those billionaires to do it, they've got the smart ideas and the business models to make it happen.” [9:20] Before you say that let's look at how the economic inequality and debt crisis in America is itself an opportunity for millionaires to grow their wealth.
[9:31] Okay, Daniel, I've got a little story for you that I think illustrates a lot of these concepts really well.
[9:37] Alright, David, hit me.
[9:39] So there's a company, it's called Mariner Finance. And what it does, it offers consumer loans, just like those publicly traded companies that we listed earlier, except that Mariner Finance is privately owned by an 11.2 billion dollar private equity fund. And Mariner Finance has figured out a clever way to draw in new business and return profits to its wealthy millionaire stockholders. And that's by mailing checks to poor people.
[10:05] Wait, what? How does it make money, David, by giving money away? That doesn't make any sense.
[10:12] No-no-no, you have to let me finish here. So first step: it mails checks the poor people. But if they cash it they have actually entered into a loan contract.
[10:21] That's not a check.
[10:24] I mean it is a check, it has value, it has money on it, but it's also a contract. One man, Steven Huggins from Nashville Tennessee received such a loan. He got a $1,200 check in the mail, saw the 33% interest rate in the fine print and decided not to touch it. But then, his truck needed maintenance, and he didn't have the money to pay for it, and he decided to take the money after all. By the time it was all over Huggins ended up borrowing $2,000 and within just one year Mariner Finance had sued him for total of $3,221.27. It's at least 61% possibly more than he had to pay above and beyond what he originally borrowed and this includes over $530 that Mariner charged him to pay their attorney who ended up suing him. Of course, it's not surprising that Huggins could not afford his own attorney. Now, I mentioned that this company makes money for its millionaire investors, I think it's worth clarifying. The minimum investment to be a stakeholder in this scheme is 20 million dollars. In 2017 Mariner sued 300 people in Boston alone forcing them all to pay for Mariner’s attorneys and some of these lawsuits have come just five months after the original check was cashed or deposited. Mariner has over 500,000 customers and 30% of its revenue is made from these fake check loans that it just directly mails the people that it knows are in desperate struggles.
[11:45] Damn, okay, that's crazy. What stands out to me, David, in this story is, you made this point in episode 5 “End of the Road”, our show on infrastructure, how the cost savings that many cities employ to try and deal with failing infrastructure ultimately is just a way to shift cost from municipal budgets and large companies onto individual residents. And example you used is how many rural towns and cities are ripping up their asphalt roads and laying down gravel or dirt roads to save on maintenance cost, which is great for alleviating our demand for sand, but if you're an individual and let's say you bought a Toyota Prius or some other fuel efficient car, well, you can't drive that Prius everyday on gravel roads. So you're going to buy a truck, but as tough as your truck is, it's not driving on smooth asphalt road anymore, it's getting beat up driving over potholes and over rivets in the road. And so you end up taking it to the shop more often, just like Mr. Huggins did with his truck, and these costs add up. So while people are falling deeper and deeper into financial uncertainty and poverty, and as student debt medical bills and cost-of-living have all exploded, the market for predatory lending companies like Mariner Finance has accelerated. And these private equity firms have been eager to acquire them as a way of delivering profits to their shareholders.
[13:05] And Daniel, these twins are not just occurring in the United States. If we turn to our friends over in the UK, household debt is now 13% higher than it was at the height of the 2008 financial crisis. This means that three million families in the UK, mostly from the poorest fifth of the population, now divert than 25% of their income to servicing that debt. According to the Jubilee Debt Campaign analyst, unless real wages rise and much is done to improve social safety nets people will just not be able to escape this debt slavery.
[13:35] Okay, so consumers have a lot of debt and it's rising. Africa: Opportunities For Predatory Financial Systems [13:39] I want to stop here, David, I think it's important for us to pause and maybe zoom out here. Because we can see how debt is impacting individual people in their families, and to a certain extent how companies can take advantage of this financial hardship people face to divert profit to their millionaire stockholders, but it's important to see how these trends might be part of a larger system of debt that's working on the national and international level, and how private companies play the role of Mariner Finance but on a global stage for whole nations. So why don't we look at the world's favorite continent and that's Africa.
[14:18] Well, whenever Africa comes up, Daniel, I mean, what are the prominent stereotypes about Africa and African people that you encounter in our Western culture? I mean, you hear the word poor a lot. More importantly how this property is somehow a symptom of people who are uneducated, maybe illiterate, backwards, sometimes even the word barbaric gets in there. And these are the types of notions which justify us exporting or Western models of education, these missionary trips from Western religious groups that are positioned to “save Africans”. But there is no denying that the land of Africa is anything but poor, in fact the continent as a whole is the richest part of the world in terms of minerals and resources, even being home to some of the oldest regions for agricultural innovation and development. In terms of minerals and oil, it’s estimated that South Africa is sitting on some two and a half trillion dollars of valuable mineral reserves. The Democratic Republic of Congo almost ten times that amount at 24 trillion dollars. And in 2015, African countries together exported 232 billion dollars worth of oil and mineral. So the continent is anything but poor. But again, I think this stereotype sold to us is that while the land itself is rich in resources the people are poor because they either squander this wealth or they don’t know how to be good stewards of their land. But if we've learned anything on this show, we would be fools to accept this line of reasoning without looking at the role of the international community plays in developing these resources.
[15:49] For that, David, we can turn to a report titled “Honest Accounts 2017 — How the world profits from Africa’s wealth”. It’s a detailed report by number of international organizations, and according to the data there's a grand total of 161.6 billion dollars that flowed into Africa in 2015 through a combination of loans, grants, foreign aid and payments for goods and services. However, 203 billion dollars was taken out of Africa leaving a net loss to the continent of 41 billion dollars. And that's what goes on every year. Now of the 200 billion dollars that was taken some 68 billion were stolen by multinational corporations illegally through a number of innovative ways such as trade misinvoicing or misrepresenting the value of goods being exported or imported in order to dodge taxes. And this represents the most common way that corporations steal from the continent adding up to 48 billion of that 68 billion dollar total.
[16:57] In addition, a significant number of multinational setup subsidiaries in tax havens and then use their ability to launder money as a way of corrupting local officials into giving steep discounts on these resources. For example, from the report: “5 major sales of mining rights in the Democratic Republic of Congo involved firms registered in the British Virgin Islands. The firm paid at least 1.36 billion dollars below the market value. Almost double what the DEC spends each year on health and education combined.” As you know from episode 36 “Slaves to Progress” the Democratic Republic of Congo with its vast mineral reserves is home to some of the most brutal slave operations in the entire world. It's incredible to think that a handful of international companies are stealing more than double in mineral rights then what the country spends on health and education. And you could obviously draw parallels in multiple countries as the 60 billion dollars stolen represents a not-insignificant share of the entire continent’s GDP.
[17:59] Clearly, David, communities in Africa may be poor but it's not because they are backwards, it's because these multinational companies and the governments that support them take far more from the continent than what they give back. And the policies that are imposed on countries like South Africa which we discussed in that first debt episode “Dead End” encourages privatization of common resources, hefty debt, austerity measures and more. But another big inflow that Africa experiences, David, is foreign aid. And many people who hold on to the stereotype of Africa as being poor and backwards are quick to point out how much we here in the United States or the UK, or whatever: we’re helping Africans through the money we send them. Well, here's the breakdown on that. In 2015 a total of 19 billion dollars in grant money was sent to Africa which is a third of the amount that multinationals stole. [18:55] Okay, so we don't really need to dig much deeper than those two simple figures to see what's really going on. In such a context, what is the meaning of our aid money anyway? This is the story of our modern world, David, our aid money is meaningless when it's paid for out of a greater share of stolen money. It's not to say that the organizations that do exist to provide aid are terrible themselves or doing bad work necessarily. But many of our aid organizations are nonprofits are NGOs, are charity and philanthropy foundations — these all exist to manage the evils created directly from the economy. And since their funding comes from the profits of the economy itself to the extent our economy is growing, the needs that these nonprofits exist to address are not truly being met in anything but a superficial surface way. It's just simple math, you know what math is, right, David?
[19:51] Yeah, I think in this case the equation looks something like profit = revenue - cost.
[19:57] That's the one I learned in Business 101.
[20:01] That's as far as I made it. But profit-seeking activities they create destruction, so think logging for very visual example. A logging company cannot pay someone enough money from its profits to restore a forest to the state it was before the logging, it's not possible. But this is the model we keep espousing with the difference being global profit is the aggregate of individual companies everywhere. We say, “People in this African country are in poverty, let’s send some aid money then!” But when their poverty is a result of wealth that was stolen from them, this aid will also and forever come up short. From the report, “The world is profiting from the continent’s wealth, more so than most African citizens, yet rich country governments simply tell their public that their aid programs are helping Africa. This is distraction and misleading.” But there's an even more insidious side of these aid money and that's to the extent that aid itself is just a tool for opening up markets to more extraction and theft. Again from the report, “Currently much aid from Western governments, which we count here as inflows, actually contributes more to outflows from Africa.” Aid that pushes privatization in key sectors such as public services, free trade or unfettered private investment can simply open up economies even further to exploitation by foreign companies. If aid is to benefit Africa it must be delinked from Western corporate interest and be based on African priorities, negotiated through open processes in country.
[21:35] Yeah, this is a big point I think that gets overlooked in this discussion of how foreign aid plays a role in developing countries. That this aid that is given, you know, this inflow that is part of that 161 billion dollars that we consider going to Africa is itself a tool for enabling more extraction. Aid, you see, is always conditional. For example, it's well-known that part of USAID's mission is to encourage private investment in developing countries. And one of his partners is the Coca-Cola Company. Recently USAID released a press release showing how its partnership with Coca-Cola would “enhance productive uses of water”. [22:16] So what, David, from the perspective of Coca-Cola mighty a productive use of water be? It’s certainly wouldn't include leaving it in the ground for locals to drink. And a lot of times the logic behind these partnerships according aid programs is, well, we partner with private companies because we can use their supply chains to get much-needed supplies into an area, But in reality it is the exact opposite: through aid money Western governments can essentially pave the way for the infrastructure that enables Coke’s supply change to reach previously untapped market, allow it to set up bottling companies in these developing markets to extract water and ultimately bring profits back home. All while pretending to engage in altruistic activities. And of course we're getting a little bit off-topic, David, foreign aid is going to be its own episode for sure, there are all kinds of contradictions with this field. And it's something we'll discuss at length eventually.
[23:10] Well, let’s turn the conversation then back towards debt which is what we promised that would be talking about here. So another inflow to the continent that's worth mentioning is of course, can you guess, Daniel? It’s debt. That's right, African countries have been the recipients of Western loans for a very long time now. Between 1973 and 1979 loans to Sub-Saharan Africa grew from 2 billion dollars to 8 billion dollars. And as debt ticked upwards we see the negative correlation with per capita GDP and poverty, with GDP per person in Sub-Saharan Africa being 15% lower in 1990 that it was a 1989, then 20% lower by 2000. And the number of people living in poverty growing by 74% in that same time period.
[23:57] In 2015 32.8 billion dollars was loaned to African governments. But in the same year 18 billion or 54% of those new loans were paid out in interest and principal payments, and these new loans resulted in an overall increase in African debt.
[24:15] Now the report goes on to make several recommendations aimed at Western and African government alike. But their recommendation on Africa's debt is really revealing I think. “Private lenders are encouraged to act irresponsibly because when debt crises arise, the IMF, World Bank and other institutions lend more money, which enables the high interest to private lenders to be paid, whilst the debt keeps growing. Laws are needed to ensure all loans to governments are transparent when they are given, particularly in the US and UK under whose laws over 90% of international loans to governments are given.”
[24:50] That last sentence, David, stands out to me. I mean, when I think about it I guess it shouldn't be that surprising, but we can't overlook the fact that 90% of international debt is structured under US and UK law. You know, big point we discussed an episode 28 “Debt End” is how the very concept of debt has wildly different meanings and connotations across different cultures and how the emergence of modern debt very much came out of a process of weaponizing financial tools to enslave and punish the colonies of Western empires. Remember that slave colony Haiti that revolted and earned its independence from France in 1972, well, the Western World responded by placing Haiti under an incredible debt as a way of paying France back for its lost property that is human property in the form of slaves. [25:44] So here we are in 2019 forcing the rest of the world to conform to these one-sided rules. And when a Westerner reads in the paper that a Latin American or an African, or South Asian country is angry about some international debt burden too often the response is, “Well, they agreed to the debt and everyone has to pay their debts.” But are we really going to fall for this perspective, is that the perspective we want to take when we recognize that Haiti had been enslaved by debt since 1792 because France considered its independence a loss of slave property? Are we really going to fall for this perspective that people who have been made poor by international pillaging and then forced to take on debt for their survival deserve to starve so that a banker in London or New York can buy front row tickets to Lakers game? Sudan And The HIPC Initiative
[26:31] Now, the whole point of describing these inflows and outflows in Africa is to set stage, so to speak, upon which vulture funds enter the picture. Many people have heard of vulture funds at this point, these private hedge funds that make profit by purchasing distressed assets at a discount and then squeezing them for every penny. There are countless examples from the private sector where this goes on. We hear about companies like Toys "R" Us where a group of firms came in and used that leverage to buy out a stressed but functioning company. And then stripped it of all its value to feed their hungry investors. Vulture funds exist ostensibly to purchase companies in trouble and then lean them up for greater efficiency, so they can be more profitable. But what does ultimately means is that these firms come in and threw a new ownership agreement, acquire the ability to strip companies of things like pension obligations, they fire employees, they do all these cost-cutting “efficiency” moves. And because they bought at a discount, they can sell this ruined company for a profit which just comes down to transferring, well, out of workers and company assets and into the pockets of investors. But this same strategy exists on the international level. These private hedge funds look at sovereign nations as a vulnerable asset to acquired at a discount and then pillaged or short-term wealth accumulation. They typically do this by purchasing the debt owed to other institutions at a discount and then aggressively attack these countries for full payment plus interest. If we stick to the African continent for just another moment we can see this occurring right now with the country of Sudan in Northern Africa.
[28:04] That's right, David, in 1984 Sudan defaulted on its meager loans when a huge drought in the region contributed to economic disaster. These loans were owed to Western governments and private companies alike. And when the country couldn't pay these groups responded by counting up the interest every year until the debt had ballooned from. 1.6 billion dollars to 8 billion dollars for private groups and from 4 billion dollars to, wait for it David, 19 billion dollars for Western governments that have been charging an exorbitant 10 to 12% each year. And now there's a group of vulture funds who have purchased part of this debt, they’ve hired attorneys that are helping to advocate for debt relief in Sudan. Now I know what you're thinking, wait, vulture funds wanting debt relief?
[28:55] I was about to say: wait a second.
[28:57] There's kind of vicious logic here and that's that if Sudan can qualify for debt relief under IMF rules, the IMF will help pay off the outstanding debt by issuing low-interest loans to the government and then these private equities will receive a huge payday. So the idea is that right now Sudan can't pay off any of its debt. But if it can get the IMF to agree to help it then these private equity funds that bought out this debt can get out of their investment with a profit. So, David, I've got a question for you: in 1996 the IMF and the World Bank launched an initiative, it was called the Highly Indebted Poor Countries initiative or HIPC, and it aims to ensure that no poor country faces a debt burden it cannot manage. Countries that make it on this list like Sudan, if they can shape up towards certain requirements, the IMF will grant these interest-free loans to help countries get to a sustainable level of debt. Now, that sounds pretty good, right?
[29:56] Yeah, I think that sounds not terrible yet but I'm sensing a catch coming up.
[30:01] Well, it’s not so straight forward. Like I mentioned, the ones who were actually advocating the most at the moment for debt relief in Sudan are these vulture funds. They purchased that inflated 8 billion dollar debt at a discount, so now if Sudan can qualify for debt relief they'll get paid less than the 8 billion dollars that debt has ballooned to but a lot more than what they paid for. But there's another interesting twist to this, which is: the initial debt to Western governments that Sudan had trouble paying ballooned from 4 billion to 19 billion and that these governments agree to debt relief for Sudan, like the US, the UK — they're going to consider that 19 billion dollars that they're forgiving as foreign aid. So 19 billion dollars, David, represent 15% of all annual aid money paid by Western governments. And so this essentially would allow them to publicize 19 billion dollars in aid without actually spending a single penny because all of these loans are basically just inflated on crazy made-up interest rates.
[31:05] That is a pretty good grift right there. And there's obviously a lot of irony here and ultimately I think this debt, that relief that might come and the IMF’s fund which enables it is a smaller microcosm of the larger system of exploitation that's plaguing the African continent as a whole. Now think about this: half of all the funding for this HIPC initiative comes from creditor countries themselves, the very countries whose loans poor countries seek relief from. It's very much like international aid where country goes into a developing nation, pillages it of some natural resource and then on the way out the door throws a couple bucks back as a gesture of generosity. But another chunk of this funding comes from the IMF itself. In 1999 the IMF sold a large portion of gold reserves and that sale ended up finding its contribution to this poor country debt relief program which of course is very ironic. Gold and silver mined by slaves funneled back to colonial empires between like the 15th and 19th centuries represents perhaps the greatest transfer of wealth that has ever occurred in the history of human civilization. And that sale of that gold is what has enabled the IMF to lend to poor countries that have been devastated by extractive activities like this very mining.
[32:18] Yeah, when you put it like that, David, history really does just repeat itself over and over.
[32:26] Just like us on this show, Daniel. But this example to me reveals that all the data: the analyses, the economic reports and the institutions that are made up by very smart people describing the economic realities of these so-called developing world are all just a giant smoke and mirrors campaign to shield the reality that the wealth of the world is nothing more than the theft and movement of crude and primitive natural resources, I guess also in addition to some more abstract forms of extraction like individualization, brain drain, although that’s ultimately a primitive transfer of resources itself as it involves human bodies — one of, if not the oldest resource to ever be exploited by other humans.
[33:09] Yeah, I mean, it's kind of like our episode on sand “Beneath the Paving Stones, the Beach”, episode 57, whereas when you look at all the innovation of our world today it really comes down to a collection of crushed-up rock. I mean that is the resource, the most mind resource in the entire world, it is what fuels the physical expansion of modern civilization. And when you start looking at debt, it's tempting to think that our financial institutions are all these complex abstract formulas, that we've unlocked some secret to generating wealth out of thin air when ultimately all it is is just getting more efficient at moving natural resources, getting more efficient at enslaving people. It really just comes down to the physical at the end of the day. And I mean that's what we talked about like in our episode “Irreplaceable” about the loss of biodiversity, which is: so much of our civilization if not all of it ultimately rests on a foundation of physical natural resources that the Earth has given us. And all we've done is we've become smarter and more efficient at exploiting those, ultimately though to our eventual collapse as these things run out: there's only so much debt that you can squeeze out of the people before they simply cannot pay it, and then you have financial crisis. There's only so much gold that you can extract from the earth, there's only so much sand that you can take from riverbeds before there's none left. Puerto Rico: Vicious Cycle [34:32] But anyway, back to this debt conversation, let's turn to another country, David, to see how the debt that poor countries take on ultimately affects the individuals within their borders and how these vulture funds exist as a necessary part of the system. And we can look at Puerto Rico for a moment because this island nation just cannot seem to catch a break, and the debt that has been increasingly added to the country's books is the shadow that just hangs over the nation making every setback worse, it just won't go away. [35:04] Now we could have done a story on Argentina which has been going through a similar debt crisis as Puerto Rico but for longer, although I think Puerto Rico is the more interesting story because unlike Argentina, which is an independent country with its own sovereignty, the ability to leverage international relations and its debt negotiations, Puerto Rico as a not quite colony but not at all independent nation is totally and completely subservient to the whims of the United States, whims which have in large part been the driving cause of Puerto Rico suffering today.
[35:37] Puerto Rico has been in a state of colonial subservience for very long time, at least since 1493, a year after Columbus sailed the ocean and offered the island as a present to Spain. In 1898 Puerto Rico changed hands to the United States and has been under her control ever since. And though Puerto Rico did enjoy modest economic gains for several decades, things took a turn for the worst in 1996 when the United States made a decision to end incentives that made US manufacturing attractive on the island. Many companies immediately fled and as a result a deep recession took place. Just a decade later we had the Global Financial meltdown and the island’s economic problems deepened. And although these problems were owed in large part to US policies, residents of Puerto Rico have always received less assistance from the US federal government than their mainland counterparts. So poverty, unemployment and cost of living — all soared, but of course so did the debt. US policies make lending to Puerto Rico extremely attractive. Exemptions exclude Wall Street from paying taxes on loans to Puerto Rico, the island is barred from bankruptcy and the island's debt is prioritized above any other item in its budget. So despite its economic issues investment bankers heavily encouraged the government to take on even more debt. [36:54] And so from 2000 to 2015, the debt, it ballooned from 25 billion dollars to 73 billion representing more than 100% of the entire nation's gross national product and diverting over one-third of the entire island’s income just to servicing that debt. Now at this point a lot of firms started to realize that this debt that they had encouraged, well, is in fact unsustainable. And it's probably not going to get paid off. So they began quickly selling their contracts off to these private equity firms, that we’ll call the vulture funds, at severe discounts. And this is where we see the value of the vulture fund business model and how they really operate.
[37:37] So there were two former IMF, International Monetary Fund officials who were commissioned to write reports separately analyzing the economic situation in Puerto Rico and recommending changes. And here's what they wrote in July of 2015, “The Puerto Rico administration has worked hard to stave off a financing crisis with important measures since 2013 including higher taxes, pension reforms and spending cuts. The debt cannot be made sustainable without growth., nor can growth occur in the face of structural obstacles and doubts about debt sustainability.” So that's our first hint: the government is doing good according to the IMF when it raises taxes, cuts pensions and cuts general spending all to stimulate growth in the economy. Now these reports go on to identify the detailed sources of Puerto Rico's economic woes and here are the recommendations. [38:35] Slash the minimum wage, because it's too high being the same as it is in the United States. Slash all the labor regulations like overtime pay. Slash welfare, slash jobs at the public utility company, fire teachers, raise taxes on the poor, transfer ownership of public resources to private corporations. These are the policies that these vulture funds want implemented to help pay the debt that they acquired, a debt by the way which at this point is mostly just interest in fees. According to a report by the ReFund America Project, “The financial firms like Goldman Sachs and Citigroup that helped structure the bonds built-in astronomically high interest rates: nearly half the debt, 33.5 billion dollars is interest and another 1.6 billion comes from fees paid to these firms.” [39:28] And what's extremely bizarre, David, but perhaps very revealing is that in one of these reports the authors state, “High minimum wages and welfare benefits have mostly hit unskilled employment and labor-intensive sectors such as tourism. The high cost of labor and transportation have meant that Puerto Rico's manufacturing sector is forced into industries such as pharmaceuticals, biotechnology and software.” Did you catch that, David? Basically according to these reports, Puerto Rico needs to grow its economy by encouraging people to take on more slave labor like jobs like cleaning hotel rooms to boost tourism and, you know, the government needs to stop encouraging these high-skilled industries like biotechnology and software. Does this not reveal in clear terms what role our Western governments thing that developing world should play, as the servants to the rich?
[40:28] As terrible as all these ideas sound, by 2015 the Puerto Rican government had largely followed these austerity recommendations: they had a yes slashed funding for healthcare and public transportation, they fired 30,000 public workers, they closed a hundred schools, and they increase sales tax by more than 50%. And in 2017 the government went even further by agreeing to furlough even more public workers, slash pension benefits by 10% and even little things like getting rid of the Christmas bonus that employees would receive. It did this to help stave off the vultures. And one result according to teachers was that layoffs would effectively shorten school year like 2 months. [41:12] This is a real example of the death spiral that we first mentioned in episode 5 “End of the Road” except instead of ballooning infrastructure cost a national budget is strained by ballooning debt that cannot be managed. And then creditors use their power to force austerity on people who are already struggling, and they pillage whole nations, their public resources which drives cost of living up even higher forcing individuals and families to take on their own debt to survive, causing people to flee which further erodes the national tax base. In fact, it's estimated that more than 300,000 people fled Puerto Rico since 2006 in direct response to these austerity measures, all this which makes it even harder to pay off at national debt. It's a vicious cycle directed intentionally from investment offices in New York, London, Los Angeles and elsewhere. And for me, Daniel, what I think hits the hardest is the impact it’s having on these children who have no choice, who are born into this, who aren’t a problem in this larger rise, but whose education and future are being sold off in order to try and service these debts which are largely predatory and made up in the first place. And this dooms the whole nation from being able to have a generation in their future who can figure out ways to make life better, they're selling themselves short and dooming themselves into this really death spiral like we mentioned.
[42:33] I think, you know, we're witnessing a slow death of public education in multiple places, David.
[42:40] Which we’ll talk about.
[42:41] Yeah, which we'll talk about, but right here in the United States, right, the LA public school teachers have been on strike not just for better wages as it's being misrepresented in the media but for, you know, they're essentially fighting against the billionaire superintendent who is trying to completely strip public education resources in order to fund a whole bunch of charter schools that will cater to the rich investors who own them. And to do this the superintendent is trying to increase classroom size as to over 40 kids per teacher, increase class sizes for those with special needs, gut money available to these teachers for resources, cut wages. It is really sad and I think, you know, it's a symptom of this death spiral that's occurring everywhere, when municipalities are struggling to meet these rising demands for their funding whether that are pensions, whether that’s infrastructure. And it’s opened the door for these billionaires with huge influence to come in and use their influence to further drive this slow death. And it's something that we want experience immediately but what is the world going to look like 15-20 years from now, when our public education infrastructure has been so gutted that the difference between a private school education that is only affordable to the rich is so vastly superior to the public option that most people have to face? And now these children are growing up and trying to make it in the world where they're competing in this highly stratified class society. There's not an easy fix for that except preventing that slow death from occurring. But like you said, that's a topic for another episode. So here's from, this was written in 2015, back to Puerto Rico, “Puerto Rico did overextend in terms of borrowing, but the overextension can't happen without a lender on the other side chasing high yield and neglecting to account for Puerto Rico's difficulties. Meanwhile, 3.5 million US citizens, already suffering from double-digit unemployment and a depressed economy, are about to get hit even harder by default and these structural reforms designed to avoid it including slashing the minimum wage. Puerto Ricans weren't the only parties in the deal who made a mistake. Those other parties, vultures who ignored clear signs of default, could get away scot-free.” Now if only the author knew, David, just how bad Puerto Ricans were about to get hit.
[45:07] The story of Puerto Rico does not end here. In just a couple months after that 2017 fiscal policy, well, hurricane Maria hit, which was followed by Hurricane Irma, and added an additional 45 billion to 95 billion dollars in cost to the country's budget. At this point the debt, the cost — none of it is even remotely possible to pay back. And it's not Puerto Rico's fault, it's not the people's fault. This time it's the fault of climate change driven by rich country industrialization and it's the fault of our global financial system which enables private funds and rich governments to hold the people of entire nation hostage. There was a special investigation by In These Times, that tracked some of the largest private-equity funds holding Puerto Rico hostage, and their activities really highlight how sick this process is. So from that report, “Then the Hurricanes hit. The bankruptcy proceedings have been postponed while the island recovers from the hurricane. But while most of the island has been offline lawyers for the bondholders have not stopped digitally submitting motions in the bankruptcy case.”
[46:12] I think that right there, David, really highlights the evil of our global financial system, where the broad structures we've created for transferring wealth have simultaneously made individual attorneys, bankers and investors the arbiters of some of the most destructive policies on Earth. While totally removing them from the visceral outcomes of their actions, where look, I'm sure none of these individual investors are necessarily evil people, I'm sure they, you know, pick up the check every now and then when they go out to dinner with their friends. They probably hire drivers to take their sons to their baseball games, they’re probably decent people to their family and those that know them personally. Yet they sit in their cornered windowed offices silently pushing documents on the court system of an island that literally has no power, no water, an island whose people are literally buried in rubble, and those bankers sip on their whiskey while pushing documents that seek to impoverish those people even more. Debt In A Climate Changing World
[47:16] As climate change intensifies more and more countries are going to be struggling economically. And the great irony is that those that are least responsible for climate change will end up suffering the most. In the United States we emit some 16.5 tons of carbon dioxide per person while small island states like Haiti emit just 0.3 tons per person. But according to a report again by the Jubilee Debt Campaign, since 2000 80% of the most dangerous climate disasters have been tropical storms and 90% of the countries affected have been small island developing states mostly in the Caribbean, and this will only get much worse, as according to the IMF, average losses from climate disasters in the Caribbean will increase up to 77% by 2100. These costs will not be limited just to these island nations but will impact most of these developing countries. The Jubilee Debt Campaign writes, “Small states are more vulnerable to climate disasters because proportionally more of their land area, economy or people can be affected by single event. Impoverished countries are particularly vulnerable because of, for example, poor quality infrastructure to cope with disasters or greater dependence on rain-fed agriculture.”
[48:31] Or for developing countries whose economy is simply export led on a few primary goods like oil, crop or minerals disasters that impact supply chains or their primary production — these events can bring national economy to its knees leading to runaway debt and opening the door for the austerity pressures that we've talked about, like in Puerto Rico. [48:52] In Venezuela something like 90% of their export revenue comes from the sale of oil which is a huge vulnerability given the massive price volatility of world oil. During the 2008 economic crisis world oil prices fell by 70% in just seven months, and in 2016 oil prices hit a 13-year low. When you combine these types of macroeconomic shocks with climate disaster for countries that are wholly dependent on the whims of international markets, this type of devastation is inevitable. And of course the flip side to that is that many small and poor countries without oil reserves or their own spend a significant share of their income on oil imports to fuel their economic growth, and price hikes can deepen a dependency on debt. [49:37] Agricultural economies are going to be devastated by climate change. Hurricane Ivan in 2004 wiped out a lot of Grenada’s nutmeg production. Before the hurricane they were exporting some 2.5 million kilograms a year but after the hurricane that dropped to just 350000 kg. And because nutmeg trees take a long time to mature, nutmeg production had only grown to just 850,000 kg a full 12 years later which is 66% less than pre-hurricane levels. So that's the reality that many agricultural and export economies face. We force them into commodity crop production, we shackled debt on these countries that is structured around these types of export-oriented economies and then, when the climate events that we create destroy their ability to pay that debt and feed their own people, we respond by shackling even more debt on them, enforcing austerity policies that impoverish their people. What Can We Do?
[50:39] So, all this stuff may sound pretty hopeless, I guess. There's very large powers at play, these are United States, these are World Bank, IMF — these nations, these institutions and of course these vulture funds that we’re talking about that are manipulating countries in order to profit off of this suffering that we see over and over, and over again. And how are we as individuals supposed to do anything about that? Especially in many cases where we're not even in these nations that are being affected by these practices. Well, I mean, there is the electoral path I guess, we could push our leaders to try and make sure that something is done, especially if we are in of these nations that are most egregious about exploiting these actions, places like United States. But that's a slow process and something that's likely not to happen because, frankly, there's not a lot of interest from the voting public about these topics, even though it affects millions, hundreds of millions of people every single day. But in our previous debt episode we talked about the concept of the debt jubilee. And if you aren't familiar with this I will encourage you to go back and listen to that episode on the whole concept of debt. Because if we remember what debt originally was about, it was to bring a community together. I know, that sounds paradoxical if you never heard that at first. But remember, if you are a small community you want to be tied to those around you. Because that’s a relationship and debt was that form of relationship. If I owed you a favor, if I owed you something, you would want to look out for me so that eventually you could get paid back. [52:06] But as time went on, as we started moving around the world debt became weaponized. It became a tool that doesn't tie communities together but is used instead to rip them apart and impart the will of an individual or group upon others who have no choice because they're at the end of the rope, buried in debt. And this is happened many times in the ancient world as well, but they created an idea, they realized that the only way to step out of these systems, to bring peace, prosperity and justice back into their world was the concept of debt jubilee: a time of celebration where debts were forgiven, where slaves were freed, where land was returned back to their owners. [52:48] And there are people who are trying to bring this concept back. We saw the Millennial Debt Jubilee program that had a little bit of success but it ended up being spun into this program that force that debt reductions only when countries agreed to policy implementations, austerity, things like that. But if we can have a true debt jubilee, if the United States, the IMF, the World Bank admit that their policies are harmful, that they are not aid like they ostensibly claim but really about making sure that their exploitation is buried under layers of bureaucracy to hide its true face. If we can come to terms with the everyday evil that we have enabled in these bureaucratic systems, that a lawyer pushes through every single day, that international courts exist in order to perpetuate, then we can get somewhere. We can start realizing that this debt serves no real purpose except to extract wealth from the poor and pass it on to the wealthy who don't need anything more, who are just serving their very self-interested greed and power aspirations. A global debt jubilee for nations, for individuals will be the only thing that saves this civilization from collapse ultimately. I'm convinced of this and you're not going to change my mind.
[54:02] Well, I think broadly too, I think understanding how these systems work is going to be really useful if we're going to build some kind of international solidarity movement like movements like Earth Strike and Extinction Rebellion are trying to do. Where so much of what is in the interest of these individual nations flies in the opposite face of what we're told is the technocratic, objective, financial or economic policies to recommend to these countries. If the continent of Africa were to keep a lot of its wealth for its own people as opposed to just letting multinational companies export all of it back to their own country, you know, African countries would need to push for more protectionist policies. And that's something you hear in Western media as like a reason that we need to go to war with a country because they're being protectionist, right? You know, like Venezuela trying to protect its resources and eject American officials and now here we are, designing another US backed coup in Latin America. Like we said, history repeats itself. But we need to understand how our economic systems are designed to enslave these countries. And if we're going to build international movements we have to support these countries as they seek to protect themselves, right? We can't give into this propaganda back home, it's going to be a lot harder for them to do that if they're on their own, they need the support of us back in our countries that are trying to exploit them and around the world. [55:29] And there's another concept I was just thinking about leading up to this episode, that is: you know, we're told that interest on loans are way for investors to compensate for the risk that they take, we're led to believe that it is the rich class who are risking their necks, putting so-called skin in the game when they direct their funds towards economic activity and that they deserve to be rewarded for their risks. And that's the idea behind this debt is that, “Oh, you want this debt jubilee, David? Well, good luck collapsing the economy, because no one's going to invest anymore.”
[56:00] I don't have to do anything, that's going to happen on its own.
[56:02] But consider the merchants, that 17th century merchant in the days of the pirate, like we discussed in our pirate episode, making deals on the wharfs of 17th century London, the same argument: the merchant deserves compensation for the risk that his ship, when it goes out to sea, might not come back, and that's why he deserves his profit for investing in these goods. But think about that for a moment, on whose shoulders does the burden of risk truly fall in that situation: a merchant sitting at home in a suit drinking coffee from some far-flung land brought back to him by the sailors that are cooped up in the belly of some ship, or does the risk fall on the actual men and women who were at the seas and for whom that merchant’s risk is literally realized? That is when the ship goes down, they actually lose their lives, while he merely loses his investment. What if we stop considering risk in this abstract way and started thinking about how these economic systems are based in the physical world? [57:06] We will start to realize that everything has been stacked against us. As we discussed in “Debt End” and like you were alluding to just now, David, debt used to be something that emerged from relationships and therefore transferring debt was not possible. But the imposition of currency allowed this debt to be transferred from one person to another, and ultimately to an institution. And these vulture funds are only possible because we allow this debt to transfer. What if we didn't allow that? What if we held lenders accountable? Say, “Fine, you want to loan money to a country that might default — fine. But when that country can't pay back the loan — you lose it and you don't get to sell it to somebody else, that's not the agreement.” And it's clear to see how this system is stacked against us when we realize: there are already clauses in loan contracts that address not transferability, right? If you take out a mortgage on a house 9 times out of 10 there will be a non-transferable clause in there, which basically states that if you sell the house or you give the house to your friend, the bank has the right to immediately enforce that loan in full payment due today. But how come we don't get that on our end? And how come when an institution lends money to a vulnerable country and then decide it doesn't want that contract anymore and sells it on pennies-on-the-dollar to someone else, how come that country then doesn't get the option to cancel that debt? If anything, that should be a breach of contract. [58:34] But that's just me here on a soapbox. I guess in the end, David, it's just a lot to think about.
[58:40] As always, Daniel. But think about it we hope you will. You can find more info on all the topics we talked about today as well as the full transcript of this episode on our website at ashesashes.org.
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