The Road to Serfdom – the Real Debt Trap

PE, World Bank, IMF, and the economic hitmen

In an earlier post, I joked about how the US has become the biggest fish caught in the so called “Chinese debt trap”.

US has become the largest recipient of loans from Chinese state-owned banks, having borrowed over $200 billion in the last decade to finance infrastructure, energy and data center projects.

The amount far outstrips borrowing by Russia or any BRI countries.

US borrowers haven’t complained about “debt traps” as they are of course too smart for that. They’ll tell you it’s normal for investors to chase high returns and their projects will deliver that.

However, “debt trap” is a real thing and is practiced by “investors” and capitalists repeatedly in modern financial history.

I recently watched a documentary about US-based private equity firms using debt to acquire and cripple a wide range of businesses.

PE firms such as KKR, Black Stone and Carlyle have found an exceptionally profitable model to use debt leverage to buy out retailers, utilities, and healthcare providers, aggressively cut costs, asset strip, and then force them into bankruptcy for breakup sales.

The target companies include well-known brands such as Toys R Us, Sports Authority, Sears, Payless, Red Lobster, and Genesis Healthcare. Even Thames Water, the largest water service in the UK.

These predatory PE firms follow a standard maneuver with their prays –

• Buy out the business with debt that uses assets of the target itself as collateral
• Pursue deep cost cutting such as layoffs, cutting employee benefits, squeezing suppliers, and reducing maintenance, quality and services
• Raise prices to consumers
• Asset strip by selling off the valuable parts of the target such as real estate, stores, equipment, brands, and profitable subsidiaries or divisions
• Force the target to load up additional debt, often to pay dividends to the PE owners
• Liquidate when the business fails, causing wholesale layoffs often without compensations

There are over 4,000 PE firms and 18,000 funds operating in the US, with over $10 trillion under management, that are actively engaged in the leveraged buyout (LBO) business.

As a result of such prevalent predatory finance, more and more US businesses are driven into debt-fueled bankruptcies, causing harm to employees and consumers alike.

The documentary reminded me of the tactics employed by the World Bank, the International Monetary Fund (IMF), and the European Central Bank against Southern European countries after the 2008 great recession.

The parallel between these government affiliated lending organizations and the vulture PE firms is uncanny.

When Italy, Spain and Greece adopted the Euro in 2002, these countries lost control over their monetary policy and the ability to adjust their currencies to manage trade imbalances or economic shocks.

They became entirely dependent on borrowing from international markets after the loss of sovereign currency.

When the 2008 crisis struck, foreign investors lost confidence, causing borrowing costs to skyrocket and triggering sovereign debt crisis.

When these countries sought help from the Troika (European Commission, ECB, and IMF), strict conditionalities were attached to the bailout.

This is equivalent to being acquired by the PE firms. These conditionalities are basically loan covenants, demanding tax hikes (raising prices), austerity (cost cutting), strict repayment schedule, and privatization (asset stripping).

Similar to the “operational improvement” euphemism used by the PE firms, such conditionalities are masked under the generic-sounding “structural adjustment”.

The result is also similar – the loan recipient countries went through a decade of painful austerity, suffered high unemployment, and reduced social welfare.

In Greece, GDP shrank 25%, unemployment hit 27%, and poverty soared.

The most damaging conditionality was the so-called “austerity” – which translated into cuts into wages, pensions, and social benefits. Broad swaths of the population were harmed.

Ironically, while the Southern Europeans countries had to endure hardship, the US, the origin of the financial crisis, used its global reserve status to print trillions of dollars in successive rounds of QEs, stimulus, and bank bailouts, exporting inflation to the rest of the world.

As Southern European countries suffered economically, a further insult was added to the injury as Wall Street and the City of London started to call them the “PIGS countries” (Portugal, Italy, Greece, and Spain).

IMF denies “intent” to exploit. However, its “structural loan design” – conditionality favoring fiscal austerity, liberalization, and creditor protection – functions to transfer risks from global finance to vulnerable populations, limit policy autonomy of borrowing countries, and lock them into debt dependency.

The debt trap is hardly unique in this instance. During the 1991 to 2001 Argentina debt crisis, it went to IMF for a bailout. IMF imposed extensive conditionalities on the bailout loans.

Argentina was forced to deregulate and privatize as well as cut social welfare on a massive scale. State assets such as water, utilities and telecom infrastructure were sold off to foreign investors at fire sale price.

However, much of the IMF money flowed not to Argentina’s budget, but to repay “private foreign creditors”, i.e. bail out the US and European banks that caused the debt bubble in the first place.

The peso peg collapsed and lost ~70% of its value in a few months. Poverty rate hit over 50%.

Joseph Stiglitz, the economist, called the IMF approach “market fundamentalism” that “prioritized financial markets over human welfare”.

The best example of such odious debt is Haiti. Haiti’s “Independence Debt” was the textbook case of colonial debt practice that has truncated a country’s development for over a century.

After defeating Napoleon’s army in 1804, Haiti became the world’s first black republic and the only nation founded by enslaved people’s successful revolt.

France sent warships and demanded Haiti to pay 150 million gold francs ($25 billion in today’s money) as “compensation” to former slaveholders for lost “property” (i.e., slaves and plantations).

With the support of the US and Britain, France successfully coerced Haiti to agree to such a “debt” but it had to borrow from French banks such as the Rothschilds at usurious rates – over 7%.

By 1900, 80% of Haiti’s national budget went to debt service and it didn’t finish paying until 1947. The debt crippled infrastructure, education, and economic development and is the root cause of Haiti’s chronic instability.

Haiti remains one of the poorest countries in the world to this day.

The “debt” imposed by France is financialized violence to punish emancipation. In 2022, even France’s Le Monde admitted “Haiti’s underdevelopment is structurally tied to this extortion”.

For me, John Perkins 2004 book Confessions of an Economic Hit Man was the ultimate revelation how predatory international finance works.

Drawing on his personal experience working with the World Bank, IMF, USAID, and private Wall Street firms, Perkins exposed the hidden mechanisms of US financial imperialism.

He laid bare the playbook –

• Inflate economic outlook at developing countries to secure World Bank or IMF loans, later complemented with private lending from transnational banks
• Ensure loan amount exceeds countries’ ability to repay
• Once indebted, pressure these countries to grant US corporations resource rights (oil, gas, minerals, etc.), allow US military bases, and align foreign policy with the US
• Adopt neoliberal economics – deregulation, privatization, reduce wages and social welfare
• Sell out state assets such as utilities, roads, ports, rail, and communications to meet debt repayment schedule
• If target countries refuse to cooperate, Washington will launch “color revolutions” or send “jackals” (i.e. the CIA) to instigate coups or assassinations

Perkins gave detailed account of how this playbook was used successfully from Indonesia, Saudi Arabia, Africa, to Panama and Latin America.

Under the sponsorship of both public and private Western financial institutions, economic hitmen like Perkins are camouflaged as “economists”, “consultants” or “advisors” to roam the world as modern day pirates to pillage and loot.

As the West deindustrializes and financializes its economy, the debt trap has become one of the key ways for profiteering. After all, the product of finance is debt in the final analysis.

And the debt trap is hardly exclusively reserved for poor and weak countries. It has been turned inward, and the population of the West is now the biggest target.

More and more citizens in the West are trapped in an ever expanding debt bubble – mortgages for unaffordable houses, student loans for higher education that is losing value by the day, car loans, credit card payments, and even payday loans for grocery.

Let alone the ever-present risk of medical bankruptcy.

Debt is the legacy of hyper financialized capitalism. The road to serfdom through debt peonage is the gift to the world from the Austrian/Chicago school of neoliberal economics.

Friedrick Hayek was right with the title of his famous book. He was just wrong about what leads to it.

 

Source: https://huabinoliver.substack.com/p/the-road-to-serfdom-the-real-debt