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Opinion: Does our economic ‘doom loop’ mean recession?

Washington treated the COVID-19 pandemic as if it was a war, but there is post-war boom coming. Instead, deficits keep piling up, and interest payments on the nation’s debt keep growing

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Senate Majority Leader Chuck Schumer, D-N.Y., speaks during a news conference on student debt forgiveness.

Senate Majority Leader Chuck Schumer, D-N.Y., speaks during a news conference on student debt cancellation on Capitol Hill in Washington, Thursday, Sept. 29, 2022.

Jose Luis Magana, Associated Press

I keep thinking back to the start of the pandemic, when Federal Reserve Chairman Jerome Powell told Congress, reluctantly, that it was time to spend money without thought for the national debt. 

This was only a few months after he had warned lawmakers — in pre-pandemic February 2020 — that the nation was on an unsustainable debt path. The economy was strong then. It would be a good time to start making ends meet, he said.

No one listened. People seldom listen to that kind of advice during good times. In fact, the narrative a lot of people listened to was just the opposite.

They listened to other voices, mainly from the left, who were spreading the notion that deficit spending didn’t really matter. As long as the economy grew faster than the debt, low interest rates would make the debt no problem at all.

Perhaps it’s human nature that we are prone to learn the hard way that the rules never change.

Today, with the Federal Reserve raising interest rates in a desperate attempt to stem inflation, the nation is facing a crisis few people seem to be addressing. Every increase in interest rates means an increase in what it will take to make interest payments on a debt that is quickly approaching $31 trillion. For reference, it was $23 trillion at the start of 2020. It was $19 trillion as the 2016 election approached.

If Americans are in search of bipartisan unity, they need look no further than the desire to overspend. 

Last week, Red Jahncke, president of the Connecticut-based Townsend Group International LLC, spelled out the problem in a Wall Street Journal op-ed. “Interest on the national debt is exploding and heading toward what economists refer to as a ‘doom loop,’” he said.

This, he explained, is “the vicious circle in which the government’s borrowing to pay interest generates yet more interest and yet more borrowing.”

Higher interest rates will drive up federal spending on the debt, while inflation does its part in driving up other government spending. Social Security adjusts upwards for inflation, and Medicare will rise along with health care costs. Both programs are already on a trajectory for major financial problems. 

Whether or not you believed Donald Trump’s assertion at the start of the pandemic that he was a wartime president, the United States truly did fund its response to COVID-19 as if it were at war.

Only, unlike during WWI and WWII, Washington didn’t raise taxes for the cause. It printed money, which led to inflation.

Those two big wars in the 20th century also led to the printing of money and inflation — which went as high as 20.7% in November 1918 and 19.7% in March 1947, as post-war America came to terms with the costs, according to government figures published by usinflationcalculator.com.

We have yet to determine how high, or for how long, inflation will plague the post-COVID-19 war world.

A paper published last week by William McBride and Alex Durante of the Tax Foundation, a research group in Washington, cited research that shows the trillions the United States poured into the fight against COVID-19 was almost all from “debt and money creation,” while 21% of the costs for WWI and 30% of the costs for WWII were paid for with higher taxes. The rest was debt, which contributed to the subsequent inflation.

But that wording is a bit misleading, because inflation is also a tax. In this case, it is one that has affected the low-to-moderate income people more than the wealthy. That’s according to the Congressional Budget Office.

Inflation and a possible recession are big worries for people in Utah, according to a recent poll by the Deseret News and the Hinckley Institute of Politics. The September poll found 96% saying they are at least somewhat concerned about inflation, while 88% are at least somewhat concerned that a recession will come within the next year. 

They have good reason to be. As September closed last week, the stock market notched three straight weeks of declines and a second month of losses in the three main indexes. Inflation remains high, and now the Federal Reserve has shown it is serious about raising interest rates in an effort to fight it.

Economies usually rebound after the nation wins a major war. But the excessive spending associated with COVID-19, as well as costly other programs, from the misnamed Inflation Reduction Act and the forgiveness of student loans, are having the opposite effect. 

If a recession comes, the government won’t be as able to spend money for relief. 

But, if I know politicians, that won’t stop them from printing more money to do so.

Which brings me back to Jerome Powell — the February 2020 version. “The federal budget is on an unsustainable path,” he said.

Washington may not understand that until circumstances force it to.