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    For Tech Companies, Years of Easy Money Yield to Hard Times

    Eighteen months ago, the online used car retailer Carvana had such great prospects that it was worth $80 billion. Now it is valued at less than $1.5 billion, a 98 percent plunge, and is struggling to survive.Many other tech companies are also seeing their fortunes reverse and their dreams dim. They are shedding employees, cutting back, watching their financial valuations shrivel — even as the larger economy chugs along with a low unemployment rate and a 3.2 annualized growth rate in the third quarter.One largely unacknowledged explanation: An unprecedented era of rock-bottom interest rates has abruptly ended. Money is no longer virtually free.For over a decade, investors desperate for returns sent their money to Silicon Valley, which pumped it into a wide range of start-ups that might not have received a nod in less heady times. Extreme valuations made it easy to issue stock or take on loans to expand aggressively or to offer sweet deals to potential customers that quickly boosted market share.It was a boom that seemed as if it would never end. Tech piled up victories, and its competitors wilted. Carvana built dozens of flashy car “vending machines” across the country, marketed itself relentlessly and offered very attractive prices for trade-ins.“The whole tech industry of the last 15 years was built by cheap money,” said Sam Abuelsamid, principal analyst with Guidehouse Insights. “Now they’re getting hit by a new reality, and they will pay the price.”Cheap money funded many of the acquisitions that substitute for organic growth in tech. Two years ago, as the pandemic raged and many office workers were confined to their homes, Salesforce bought the office communications tool Slack for $28 billion, a sum that some analysts thought was too high. Salesforce borrowed $10 billion to do the deal. This month, it said it was cutting 8,000 people, about 10 percent of its staff, many of them at Slack.Even the biggest tech companies are affected. Amazon was willing to lose money for years to acquire new customers. It is taking a different approach these days, laying off 18,000 office workers and shuttering operations that are not financially viable.Carvana, like many start-ups, pulled a page out of Amazon’s old playbook, trying to get big fast. Used cars, it believed, were a highly fragmented market ripe for reinvention, just the way taxis, bookstores and hotels had been. It strove to outdistance any competition.The company, based in Tempe, Ariz., wanted to replace traditional dealers with, Carvana said grandly, “technology and exceptional customer service.” In what seemed to symbolize the death of the old way of doing things, it paid $22 million for a six-acre site in Mission Valley, Calif., that a Mazda dealer had occupied since 1965.More on Big TechLayoffs: Some of the biggest tech companies, including Alphabet and Microsoft, have recently announced tens of thousands of job cuts. But even after the layoffs, their work forces are still behemoths.A Generational Divide: The industry’s recent job cuts have been eye-opening to young workers. But to older employees who experienced the dot-com bust, it has hardly been a shock.Supreme Court Cases: The justices are poised to reconsider two crucial tenets of online speech under which social media networks have long operated.In the Netherlands: Dutch government and educational organizations have spurred changes at Google, Microsoft and Zoom, using a European data protection law as a lever.Where traditional dealerships were literally flat, Carvana built multistory car vending machines that became memorable local landmarks. Customers picked up their cars at these towers, which now total 33. A corporate video of the building of one vending machine has over four million views on YouTube.In the third quarter of 2021, Carvana delivered 110,000 cars to customers, up 74 percent from 2020. The goal: two million cars a year, which would make it by far the largest used car retailer.An eye-catching Carvana car vending machine in Uniondale, N.Y.Tony Cenicola/The New York TimesThen, even more quickly than the company grew, it fell apart. When used car sales rose more than 25 percent in the first year of the pandemic, that created a supply problem: Carvana needed many more vehicles. It acquired a car auction company for $2.2 billion and took on even more debt at a premium interest rate. And it paid customers handsomely for cars.But as the pandemic waned and interest rates began to rise, sales slowed. Carvana, which declined to comment for this article, did a round of layoffs in May and another in November. Its chief executive, Ernie Garcia, blamed the higher cost of financing, saying, “We failed to accurately predict how all this will play out.”Some competitors are even worse off. Vroom, a Houston company, has seen its stock fall to $1 from $65 in mid-2020. Over the past year, it has dismissed half of its employees.“High rates are painful for almost everyone, but they are particularly painful for Silicon Valley,” said Kairong Xiao, an associate professor of finance at Columbia Business School. “I expect more layoffs and investment cuts unless the Fed reverses its tightening.”At the moment, there is little likelihood of that. The market expects two more rate increases by the Federal Reserve this year, to at least 5 percent.In real estate, that is trouble for anyone expecting a quick recovery. Low rates not only pushed up house prices but also made it irresistible for companies such as Zillow as well as Redfin, Opendoor Technologies and others, to get into a business that used to be considered slightly disreputable: flipping houses.In 2019, Zillow estimated it would soon have revenue of $20 billion from selling 5,000 houses a month. That thrilled investors, who pushed the publicly traded Seattle company to a $45 billion valuation and created a hiring boom that raised the number of employees to 8,000.Zillow’s notion was to use artificial intelligence software to make a chaotic real estate market more efficient, predictable and profitable. This was the sort of innovation that the venture capitalist Marc Andreessen talked about in 2011 when he said digital insurgents would take over entire industries. “Software is eating the world,” he wrote.In June 2021, Zillow owned 50 homes in California’s capital, Sacramento. Five months later, it had 400. One was an unremarkable four-bedroom, three-bath house in the northwest corner of the city. Built in 2001, it is convenient to several parks and the airport. Zillow paid $700,000 for it.Zillow put the house on the market for months, but no one wanted it, even at $625,000. Last fall, after it had unceremoniously exited the flipping market, Zillow unloaded the house for $355,000. Low rates had made it seem possible that Zillow could shoot for the moon, but even they could not make it a success.Ryan Lundquist, a Sacramento appraiser who followed the house’s history closely on his blog, said Zillow realized real estate was fragmented but perhaps did not quite appreciate that houses were labor-intensive, deeply personal, one-to-one transactions.“This idea of being able to come in and change the game completely — that’s really difficult to do, and most of the time you don’t,” he said.Zillow’s market value has now shrunk to $10 billion, and its employee count to around 5,500 after two rounds of layoffs. It declined to comment.The dream of market domination through software dies hard, however. Zillow recently made a deal with Opendoor, an online real estate company in San Francisco that buys and sells residential properties and has also been ravaged by the downturn. Under the agreement, sellers on Zillow’s platform can request to have Opendoor make offers on their homes. Zillow said sellers would “save themselves the stress and uncertainty of a traditional sale process.”That partnership might explain why the buyer of that four-bedroom Sacramento house, one of the last in Zillow’s portfolio, was none other than Opendoor. It made some modest improvements and put the house on the market for $632,000, nearly twice what it had paid. A deal is pending.“If it were really this easy, everyone would be a flipper,” Mr. Lundquist said.An Amazon bookstore in Seattle in 2016. The store is now permanently closed.Kyle Johnson for The New York TimesThe easy money era had been well established when Amazon decided it had mastered e-commerce enough to take on the physical world. Its plans to expand into bookstores was a rumor for years and finally happened in 2015. The media went wild. According to one well-circulated story, the retailer planned to open as many as 400 bookstores.The company’s idea was that the stores would function as extensions of its online operation. Reader reviews would guide the potential buyer. Titles were displayed face out, so there were only 6,000 of them. The stores were showrooms for Amazon’s electronics.Being a showroom for the internet is expensive. Amazon had to hire booksellers and lease storefronts in popular areas. And letting enthusiastic reviews be one of the selection criteria meant stocking self-published titles, some of which were pumped up with reviews by the authors’ friends. These were not books that readers wanted.Amazon likes to try new things, and that costs money. It took on another $10 billion of long-term debt in the first nine months of the year at a higher rate of interest than it was paying two years ago. This month, it said it was borrowing $8 billion more. Its stock market valuation has shrunk by about a trillion dollars.The retailer closed 68 stores last March, including not only bookstores but also pop-ups and so-called four-star stores. It continues to operate its Whole Foods grocery subsidiary, which has 500 U.S. locations, and other food stores. Amazon said in a statement that it was “committed to building great, long-term physical retail experiences and technologies.”Traditional book selling, where expectations are modest, may have an easier path now. Barnes & Noble, the bricks-and-mortar chain recently deemed all but dead, has moved into two former Amazon locations in Massachusetts, putting about 20,000 titles into each. The chain said the stores were doing “very well.” It is scouting other former Amazon locations.“Amazon did a very different bookstore than we’re doing,” said Janine Flanigan, Barnes & Noble’s director of store planning and design. “Our focus is books.” More

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    Inflation Is Cooling, Leaving America Asking: What Comes Next?

    After six months of declines, inflation seems to be turning a corner. But the road back to normal is an uncertain one.Martin Bate, a 31-year-old transportation planner in Fort Worth, spent the middle of 2022 feeling that he was “treading water” as high gas prices, climbing food costs and the prospect of a big rent increase chipped away at his finances.“I was really starting to feel financially squeezed in a way that I hadn’t felt ever before, since finishing college,” Mr. Bate said. Since then, he has received a promotion and a raise that amounted to 12 percent. Gas prices have fallen, and local housing costs have moderated enough that next month he is moving into a nicer apartment that costs less per square foot than his current place.“My personal situation has improved a good amount,” Mr. Bate said, explaining that he’s feeling cautious but hopeful about the economy. “It’s looking like it might shape out all right.”People across the country are finally experiencing some relief from what had been a relentless rise in living costs. After repeated false dawns in 2021 and early 2022 — when price increases slowed only to accelerate again — signs that inflation is genuinely turning a corner have begun to accumulate.Inflation has slowed on an annual basis for six straight months, dipping to 6.5 percent after peaking at about 9 percent last summer, partly as gas has become cheaper. But the deceleration is true even after volatile food and fuel are stripped out: So-called core consumer prices have climbed 0.3 percent or less for each of the past three months. That’s faster than the 0.2 percent month-to-month changes that were typical before the pandemic but much slower than the 0.9 percent peak in April 2021. More

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    Families Struggle as Pandemic Program Offering Free School Meals Ends

    A federal benefit guaranteeing free school meals to millions more students has expired as food prices have risen. Many families are feeling the pinch.Like other parents, April Vazquez, a school nutrition specialist in Sioux Falls, S.D., is cutting coupons, buying in bulk and forgoing outings and restaurant meals. Still, a hot lunch in the school cafeteria for her three children is now a treat she has to carefully plan in her budget.The expiration of waivers that guaranteed free school meals for nearly 30 million students across the United States during the pandemic has meant that families like Ms. Vazquez’s who earn just over the income threshold no longer qualify for a federal program allowing children to eat at no cost.As pandemic-era assistance programs lapse and inflation reaches record highs, Ms. Vazquez is hardly alone. The number of students receiving free lunches decreased by about a third, to around 18.6 million in October, the latest month with available data. In comparison, about 20.3 million students ate free in October 2019, before the pandemic. That drop can be attributed to several factors, like being on the cusp of eligibility, lack of awareness that the program had ended by the start of the school year and fewer schools participating in the program overall.“It’s just making things a hell of a lot harder at the most difficult moment that I think American families have seen in a generation,” said Keri Rodrigues, co-founder and president of the National Parents Union network.For Ms. Vazquez, returning to a reality where she must pay full price for a school meal — about $3 or $4 for each child — is trying, and most days, her children bring a packed lunch. (Bagels, cream cheese and apples are typical; grapes and strawberries are rare because they are too expensive.)“It’s painful to know that my kids aren’t going to get free or reduced,” she said.The number of students receiving free lunches decreased by about a third, to about 18.6 million last October.Amber Ford for The New York TimesBefore the pandemic, Ms. Vazquez worked part-time as a special education assistant and her children teetered between qualifying for free or reduced-price meals year to year. But when she took a full-time job as a nutritionist in August 2021, her salary was just enough to bump her family above the income threshold for either benefit: about $42,000 annually for free meals for a family of five and $60,000 for reduced-price meals.“That was actually a worry when I applied for this position, because you don’t know what’s going to happen, am I going to get disqualified for this?” she said, adding that she ultimately took the job with a view toward long-term financial stability.Even as some parents have seen their wages increase and the criteria for free and reduced-price meals expand, those boons have done little to blunt the impact of rising food costs.From the 2019-20 school year to this school year, the income eligibility for free and reduced-price meals has increased by about 7.8 percent. Average hourly wage growth in that same period grew by 15.1 percent. Consumer prices, though, have risen by 15.4 percent, and food prices by 20.2 percent, surpassing wage growth.More on U.S. Schools and EducationChatGPT: OpenAI’s new chatbot is raising fears of students cheating on their homework. But its potential as an educational tool outweighs its risks, our columnist writes.Boosting Security: New federal data offers insight into the growing ways that schools have amped up security over the past five years, as gun incidents on school grounds have become more frequent.Teaching Climate Change: Many middle school science standards don’t explicitly mention climate change. But some educators are finding ways to integrate it into lessons. In Florida: The state will not allow a new Advanced Placement course on African American studies to be offered in its high schools, stating that the course is not “historically accurate.”In the Sioux Falls School District — where Ms. Vazquez works and where her children attend school — about 41 percent of children qualified for free or reduced-price lunch this school year, compared with about 49 percent before the pandemic, said its nutrition director, Gay Anderson. Some parents have remarked that they would be “better off missing half a week’s work to get that free meal,” she said.“The income eligibility guidelines are just not keeping pace with inflation, and families are barely making ends meet. So what we’re seeing is a lot of people are saying, ‘I can’t believe I don’t qualify as I always did.’ If they are making a dollar more, or whatever, that will do it,” Ms. Anderson said.At Wellington Exempted Village Schools in northeastern Ohio, Andrea Helton, the nutrition director, described denying the program to nearly 50 families in a school district of about 1,000 students. She recalled a single mother who lamented, “I missed the cutoff for reduced meals by $100 of gross income.”But Ms. Helton said, “There’s nothing I can do, and it’s heartbreaking.”Andrea Helton is the nutrition director at Wellington Exempted Village Schools in northeastern Ohio. Amber Ford for The New York TimesFamilies are also struggling to navigate a maze of new rules or, unaware that the program had ended, contending with having to pay for meals that had once been free.Megan, a mother of three school-aged children in Ms. Helton’s district who asked to be identified only by her first name because of privacy concerns, said that she had grown accustomed to the program. So when the school pressed her for money owed for unpaid lunches, “it was a shocker.”By the end of the fall semester, she had racked up $136 in debt.When Megan learned that holiday donations to the school district had wiped out that sum, “I just melted into a puddle because when you’re down to that last $100, the last thing you want to have to worry about is whether your kids are eating or not,” she said through tears.It is difficult to estimate how many students are now going hungry. But school officials and nutrition advocates point to proxy measurements — debt owed by families who cannot afford a school meal, for example, or the number of applications for free and reduced-price meals — as evidence of unmet need.In a survey released this month by the School Nutrition Association, 96.3 percent of school districts reported that meal debt had increased. Median debt rose to $5,164 per district through November, already higher than the $3,400 median reported for the entire school year in the group’s 2019 survey.The end of universal school meals has led fewer schools to participate in the program overall: 88 percent of public schools are operating a meal program this school year.Alyssa Schukar for The New York TimesAt school, Ms. Vazquez described witnessing children sitting in the cafeteria with packed lunches consisting of only a bag of chips or an apple. Others have inched toward the cash register with a lunch tray, a look of fear and recognition flashing across the “kid’s eyes when they see the computer, like, ‘Yeah, I know I’m negative, but I want to eat,’” she said.“You see other kids struggle and knowing, hey, I’m in the same boat,” she added. “I know exactly what you’re going through.”The end of universal school meals has led fewer schools to participate in the program overall: About 88 percent of public schools are operating a meal program this school year, compared with 94 percent in the previous school year, and 27.4 million children were eating a school lunch in October, compared with about 30 million in May, the last month of the school year with the program in place. That can create a vicious cycle in which lower participation translates to higher costs per meal, forcing schools to raise the price of a meal and squeezing out even more families, said Crystal FitzSimons of the Food Research and Action Center, which routinely talks to schools about their nutrition programs. Schools and families alike face other administrative and financial complications as school officials grapple with soaring wholesale costs and labor shortages, highlighting other challenges in increasing participation. Now officials must process paperwork to verify income eligibility, devote time and personnel for debt collection and plan ahead for expected revenue and reimbursement rates.At Prince William County Schools in Virginia, Adam T. Russo, the nutrition director, said his office has had to dedicate more resources for outreach and education to inform parents of the policy change. Already, he relies on a multilingual staff to serve the 90,000 students in his district, one of the most diverse in the state.Adam T. Russo relies on a multilingual staff to serve the 90,000 students in his district.Alyssa Schukar for The New York TimesFor many parents, he said, the process was new and potentially confusing given that universal free meals had been in place since some of their children had started school.“If your kid was in kindergarten, first grade, second grade, this is a completely foreign process to your family,” he said. “It’s been table stakes, and we’ve pulled the tablecloth out from under our families.”The application process, as well as the stigma associated with receiving a free or reduced-price lunch, can be prohibitive, advocates say. In 2019, even as some 29.6 million students were eligible for free or reduced-price meals, only 22 million received one, according to research. And about 20 percent of eligible households whose children did not receive either benefit reported food insecurity.“The effort it takes to make sure these resources actually hit those kids, for what that costs, it’s a hell of a lot easier to just say, listen, food is free,” Ms. Rodrigues said.The universal free school meal program pushed the federal cost of school nutrition programs from $18.7 billion in the 2019 fiscal year to $28.7 billion in the 2022 fiscal year, according to data from the Agriculture Department, which administers the program. The department does not have an official estimate of the cost of permanently enacting the policy, a spokeswoman said.Such an initiative has drawn widespread support, with polls showing 74 percent of voters and 90 percent of parents favoring the idea, but federal enactment seems unlikely. Republican lawmakers in Congress oppose permanently extending the policy, arguing that free meals should serve only the neediest and that pandemic-era policies must eventually end.Still, some states — and some parents — have been spurred to take action. For Amber Stewart, a mother of five in Duluth, Minn., the program was lifesaving.Before the pandemic, when the family owed money for meals, her daughter would receive a cold cheese sandwich and a carton of milk, signaling to classmates she could not afford the hot meal. Stern letters demanded repayment and warned of consequences.“Then the pandemic rolled around and everybody was eligible for the free meals, and they delivered it or you could go pick it up,” said Ms. Stewart, who asked to be identified by her maiden name. “It was amazing.”Intent on seeing the program enacted permanently, Ms. Stewart is now lobbying the Minnesota legislature to adopt universal free schools meals statewide, a policy that the governor recently endorsed. Under the new income guidelines, Ms. Stewart’s children now qualify for reduced-price meals. And because of a state law that covers the fees normally owed by families in that category, they are not charged the 35 or 50 cents for breakfast or lunch.That has been crucial, she said, because even after weekly trips to the food bank, she does not have nearly enough to get by.“Our money is really tight,” she said. “With the cost of groceries and everything, we’re barely making it.” More

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    How the U.S. Government Amassed $31 Trillion in Debt

    Two decades of tax cuts, recession responses and bipartisan spending fueled more borrowing — contributing $25 trillion to the total and setting the stage for another federal showdown.WASHINGTON — America’s debt is now six times what it was at the start of the 21st century. It is the largest it has been, compared with the size of the U.S. economy, since World War II, and it’s projected to grow an average of about $1.3 trillion a year for the next decade.The United States hit its $31.4 trillion legal limit on borrowing this past week, putting Washington on the brink of another fiscal showdown. Republicans are refusing to raise that limit unless President Biden agrees to steep spending cuts, echoing a partisan standoff that has played out multiple times in the last two decades.But America’s ballooning debt is the result of choices made by both Republicans and Democrats. Since 2000, politicians from both parties have made a habit of borrowing money to finance wars, tax cuts, expanded federal spending, care for baby boomers and emergency measures to help the nation endure two debilitating recessions.“There have been bipartisan tax cuts and bipartisan spending increases” driving that growth, said Maya MacGuineas, president of the Committee for a Responsible Federal Budget and perhaps the pre-eminent deficit hawk in Washington. “It’s not the simple story of Republicans cut taxes and Democrats grow spending. Actually, they all like to do all of it.”Few economists believe the level of debt is an economic crisis at the moment, though some believe the federal government has become so large that it is taking the place of private businesses, hurting growth in the process. But economists in Washington and on Wall Street are warning that failing to raise the debt limit before the government begins shirking its bills — as early as June — could prove catastrophic.Despite all the fighting, lawmakers have taken few steps to reduce the federal budget deficit they have produced. It has been nearly a quarter-century since the last time the government spent less than it received in taxes.Because spending programs today are so politically popular, and because retiring baby boomers are driving up the cost of programs like Social Security and Medicare every year, budget experts say it is unrealistic to expect the books to balance again for another decade or more.The White House estimates that borrowed money will be necessary to cover about one-fifth of a $6 trillion federal budget this fiscal year — a budget that includes military spending, the national parks, safety net programs and everything else the government provides.In just two decades, America has added $25 trillion in debt. How it got itself into this fiscal position has its roots in a political miscalculation at the end of the Cold War.President Lyndon B. Johnson signing Medicare into law in 1965. In part because of the popularity and rising costs of programs like Medicare, federal deficits are expected to continue for at least a decade.Associated PressIn the 1990s, America reaped a so-called peace dividend. It reduced spending on the military, believing it would never have to invest as much in national security as it had when the Soviet Union was a threat. At the same time, a dot-com boom delivered the highest federal tax receipts, as a share of the economy, in several decades.Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More

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    Fed Rate Increases Have ‘A Ways to Go,’ Top Official Says

    Christopher Waller, a Federal Reserve governor, said he favored a quarter-point move. Many of his colleagues agree — or haven’t ruled it out.Christopher Waller, a Federal Reserve governor, added his voice on Friday to a chorus of central bank officials who favor slowing rate increases at the central bank’s Feb. 1 meeting. That most likely locks in place market expectations for a return to smaller policy adjustments after a series of jumbo rate moves.Mr. Waller spoke on the eve of the central bank’s quiet period before its meeting, which means investors will not hear any more commentary from Fed officials before they make their rate decision. His comments were in line with what many of his colleagues have said: Several openly support slowing down rate increases at the meeting, and top policymakers who haven’t made up their minds have not ruled it out.Central bankers raised rates rapidly in 2022, lifting borrowing costs in three-quarter-point increments for much of the year, before slowing to a half-point move in December. But they are entering a new phase that is focused more on how high interest rates rise and less on how quickly they get there. The thinking is that rates are now high enough to meaningfully slow the economy, and that adjusting them more gradually will give policymakers time to see how their policy is working.That has nudged policymakers toward a quarter-point increase, also known as 25 basis points, an increment that was common before the pandemic.“After climbing steeply and using monetary policy to significantly raise interest rates throughout the economy, it was apparent to me that it was time to slow, but not halt, the rate of ascent,” Mr. Waller said of the December downshift. “There appears to be little turbulence ahead, so I currently favor a 25-basis-point increase” at the Fed’s next meeting, he said.Inflation F.A.Q.Card 1 of 5What is inflation? More

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    Here’s what you need to know about a blockbuster court fight over Cuba’s debt

    The Cuban government is facing a high-stakes court case over unpaid commercial debt.
    If Cuba loses, it could ultimately cost the island nation billions.
    The loans in question were denominated in German Deutschmarks, a currency that no longer exists.

    A Cuban pilgrim participates in the San Lazaro procession at El Rincon church in Havana, on December 16, 2022.
    Yamil Lage | AFP | Getty Images

    Accusations of bribery, an imprisoned Cuban bank official and Interpol all feature in a high-stakes case against the Cuban government set to start Monday in the United Kingdom’s High Court.
    The legal battle is over a portion of Cuba’s unpaid commercial debt dating back to the 1980s. If Cuba loses, it could ultimately cost the island nation billions in long overdue payments — and, in a worst-case scenario, lead to the seizure of government-owned assets such as oil tankers and in-bound wire transfers.

    Investment fund CRF1, originally called the Cuba Recovery Fund, is suing Cuba for roughly $72 million in principal and past due interest on two loans it now owns. They were originally granted to the Caribbean island nation by European commercial banks in the 1980s, and were denominated in German Deutschmarks, a currency that no longer exists.
    This is the first time Cuba is facing legal action for what is estimated to be about $7 billion in outstanding commercial loans from the 1970s and 1980s. If CRF wins this case on this small slice of that debt, it could lead to further lawsuits from creditors with claims rising into the billions. Any unpaid judgments could lead to asset seizures.
    If they don’t reach a deal, Cuba could then face yet another court fight over whether it finally has to pay. If CRF is successful, it could lead to many other creditors filing suit, with claims rising into the billions.
    Cuba would be unable to borrow in the international capital markets until its debts are settled. According to the World Bank, Cuba’s gross domestic product in 2020 was $107 billion, slightly larger than New York City’s budget. The country has managed to survive for decades on the largess of other sympathetic governments: the former Soviet Union, Venezuela and China. But with Venezuela financially strained and China facing a weaker economy, those lifelines look increasingly undependable.
    Because of the U.S. embargo against Cuba, American investors are prohibited from owning and trading Cuban debt, which frustrates some frontier-market hedge fund managers in the U.S. They argue that holding Cuban debt would better serve U.S. foreign policy interests because it would give Americans a seat at some future negotiating table.

    An old American car passes by the Floridita bar in Havana on December 27, 2022.
    Adalberto Roque | AFP | Getty Images

    Beyond the commercial debt, there are still nearly 6,000 claims outstanding from Americans and American companies whose properties were confiscated by the Cuban government after former leader Fidel Castro came to power in a coup in 1959.
    John Kavulich, the longtime head of the U.S.-Cuba Trade and Economic Council, a private, nonpartisan nonprofit, says the lawsuit “may prove stimulative” to the U.S. and Cuban administrations “to negotiate a settlement for the 5,913 claims valued at $1.9 billion.”

    Details of the case

    The trial is expected to last eight days. It will feature remote testimony from an imprisoned former employee of the Banco Nacional de Cuba, Raul Eugenio Olivera Lozano.
    According to documents filed in the case, Lozano is serving a 13-year prison sentence after he was convicted in Cuba for accepting bribes of more than $25,000 in exchange for processing paperwork that allowed the loans in question to be reassigned to CRF from Chinese-owned ICBC Standard Bank. 
    In filings with the court, CRF says the bribery claims are “scurrilous” and that Lozano was railroaded by the Cuban government for the purpose of not having to pay back the loans. Human rights organizations have long criticized Cuba for arbitrary detention and lax rule of law. Both Amnesty International and Human Rights Watch describe it as one of the most repressive regimes in the world.
    There are other costs to consider, too. Thus far, the Cuban government has spent roughly $3 million on legal fees in its defense, and the plaintiffs have spent about $2.6 million. In the U.K., the loser pays the winner’s legal fees, so one of the parties will be out nearly $6 million. 
    Cuban officials and their lawyers declined to comment.
    Also expected to testify is Jeet Gordhandas. He is a representative of CRF whom the plaintiffs say was prevented from entering Mexico after the Cuban government issued a “Red Notice” through Interpol for his arrest, claiming he initiated the bribe.

    Cuban boxers prepare for their fights in the first official women’s boxing program in Cuba at the Giraldo Cordova boxing school in Havana, on December 17, 2022.
    Yamil Lage | AFP | Getty Images

    In more recent filings, the Cuban government appears to have backed away from the bribery accusation. Instead, it is arguing that the bank executives who facilitated the reassignment of the debt did not have the authority to do so.
    Cuba also argues that CRF, which is registered in the Cayman Islands, is a “vulture fund, which invests in distressed Cuban sovereign debt for enforcement purposes.”  David Charters, the chairman of CRF, pushed back: “Characterizing us as a vulture fund is a gross misrepresentation of us.”
    CRF, meanwhile, says in court filings that it first reached out to Cuba 10 years ago to settle the debt but were ignored. The fund also says it didn’t file suit until it made multiple attempts over the decade to meet with Cuban authorities.
    In 2018, CRF says in filings, the fund offered the Cuban government a better deal than the one the country struck in 2015 with bilateral creditors for billions in unpaid debts. Cuba also ignored that overture, according to CRF. Bilateral loans are government-to-government loans. 
    CRF would rather not go to court, Charters said in an interview, days before the trial.
    “We are seeking to engage Cuba even at this late stage. Even today we are ready to talk,” he said. “You make offers, and nothing happens, you are either ignored or rebuffed, so what do you do? It’s been a decade.”

    What happens to bad old debt

    Defaulted loans trade on the secondary market. There are investors who specialize in buying them at discounts to the loan’s face value and then in negotiating with the government in question to finally settle them. Usually, it’s at a discount to face value and some portion of the past due interest. 
    Often, the settlement is not in the form of cash, but rather in some other type of long-term financial instrument. One example is a GDP warrant, which pays out based on the growth level of country’s GDP over an extended period.
    GDP warrants were used in the Greek debt restructuring in 2012. Sometimes debts are settled via a debt-for-equity swap, in which the creditor receives a concession or ownership of a government-owned property such as an airport or a port, and the creditors receive a share of the revenues generated by the assets.
    For decades, Cuban debt has traded around 8 to 10 cents on the dollar, with occasional spikes driven by events such as the death of former Cuban dictator Fidel Castro in 2016 or the temporary thawing of U.S.-Cuba relations under then-President Barack Obama in 2014, in the hopes that a settlement was more likely.  
    Getting paid on very old, defaulted debt isn’t without precedent. Iraqi debt traded between 8 and 10 cents on the dollar for a decade, and then settled for roughly 32 cents on the dollar after the U.S. invasion in 2003.
    Even though Cuba’s defaulted debt is nearly 40 years old, there’s a precedent for bondholders waiting even longer. More than 300,000 holders of czarist-era Russian bonds, which the Bolsheviks defaulted on in 1917 after the revolution, received payment in 2000. 
    Michelle Caruso-Cabrera, a CNBC contributor, has 30 years of experience at the nexus of finance, economic development, and communication.

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    New Orleans Port Expansion Shows Optimism on Future of Global Trade

    NEW ORLEANS — The pandemic-era collapse of supply chains spurred speculation that globalization was on the decline, as companies vowed to become less reliant on foreign providers of goods and services. But if New Orleans is any example, the world is headed for less of a retreat from global trade and more of an overhaul to how it operates.A critical gateway between the Mississippi River and global oceans, New Orleans has been an entry and exit point for the United States since before the Louisiana Purchase. The city is now betting that position will continue — and even deepen — as the world enters a new era of global integration.The New Orleans port is one of the nation’s busiest for agricultural exports like soybeans and corn. But it has struggled to compete for the lucrative imports that are ferried on huge ships from Asia in part because those vessels cannot fit under a local bridge. As global supply chains rearrange in the pandemic’s wake, New Orleans’s proximity to Mexico and its position on the Mississippi River could help make it a crucial stop in what many expect to be a more resilient and supply chain of the future.Executives at the New Orleans port are wagering on that transformation: They recently unveiled a plan to spend $1.8 billion on expanding the port to a new site that can handle more trade and accommodate bigger boats.That optimism about the future of trade breaks with some of the worst fears of the past few years, as pandemic-related supply chain disruptions, Covid lockdowns in China and Russia’s war with Ukraine shook confidence in the global trading system. Policymakers and company executives vowed to become less reliant on China and to locate supply chains closer to home. That prompted predictions that the world was headed for a period of “de-globalization,” in which the trade and financial ties that have brought countries closer in recent decades would spin into reverse.So far, economic data show few signs of such a sharp retreat. Global trade volumes are growing more slowly, but they continue to reach new highs, with significantly more goods and currency crossing international borders than ever before.New Orleans has long been a key artery through which products made in the America’s South and Midwest flow to buyers overseas.Some firms are looking beyond China for manufacturing capacity, but that doesn’t necessarily mean that they are retreating from global integration: Many are turning to countries like Mexico, India and Vietnam. And even as pandemic supply chain issues have alerted companies to the risks inherent in the existing trading system, that seems to be encouraging them to diversify their global supply chains, not dismantle them.The trends, and the way institutions like the Port of New Orleans, are responding underscore that globalization is evolving rather than unraveling altogether. The changes to trade now underway seem likely to rework who partners with whom and could make international commerce less efficient and more expensive. But the profit motives that have encouraged companies to search out the globe for parts, workers and new markets are still going strong.“When I hear people say the word ‘globalization,’ what I hear is ‘cost minimization,’” Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in an interview on Jan. 7. “The new globalization is not going to have that second part to it.”Inflation F.A.Q.Card 1 of 5What is inflation? More

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    The U.S. Hit Its Debt Limit. What Happens Next?

    The Treasury Department has started employing “extraordinary measures,” but the path to raising the debt ceiling is likely to be a long one.The United States hit a limit this week on how much money it can borrow, forcing the Treasury Department to initiate so-called extraordinary measures to make sure the nation has enough cash to fulfill its financial obligations.Treasury Secretary Janet L. Yellen has told lawmakers that those measures will allow the United States to keep paying military salaries, retiree benefits and interest to bondholders through at least early June.But initiating those extraordinary measures is just the first step in a series of moves that will take place as the Treasury tries to keep the United States from defaulting on its debt. Ultimately, it will be up to Congress to decide whether to let the country borrow more money or allow it to default on its debt by failing to pay investors who expect interest and other payments.At stake is the fate of the U.S. economy, which could face a financial crisis and fall into a deep recession if lawmakers cannot reach an agreement.Among the looming questions is when the United States will hit the so-called X-date — the point at which the government can no longer find creative ways to stay beneath the $31.4 trillion debt limit and will need to borrow more money or fail to pay its bills.The other big question: Will Congress agree to raise the borrowing cap?So far, House Republicans have vowed to oppose any increase in the debt limit without spending cuts. President Biden has said the debt limit needs to be raised without conditions. That has set up what could be a protracted fight to ensure that the United States does not default on its debt.Here are some of the key moments to expect over the next few months.A Spring Budget BattleThe White House is expected to unveil its annual budget proposal in early March, outlining Mr. Biden’s spending priorities. That could serve as an opening bid for any negotiations between the Biden administration and Republicans in Congress, who have been calling for spending cuts and are likely to seize on this document as evidence of what they say is “runaway spending.”Understand the U.S. Debt CeilingCard 1 of 5What is the debt ceiling? More