As our economy continues its rapid recovery from the pandemic and we are likely to achieve herd immunity by April, the Democratic Congress is on the verge of passing a $1.9 trillion Covid Relief Stimulus Bill.
This is a terrible idea for many reasons:
- It isn’t needed. Congress has already provided a total of $3.3 trillion in Covid Relief, or 16% of annual GDP. An extra $1.9 trillion would raise this to 24% of GDP, by far the highest in the world (see chart).
- The exploding national debt is an extremely serious problem, already predicted by the Congressional Budget Office to reach 202% of GDP by 2051 (double the current level). Carelessly throwing an additional $2 trillion more at the debt speeds up the time for when our next fiscal crisis hits, which will be a doozy.
- Right now our debt is almost “free” money because interest rates are so low. But we can’t assume that this will continue indefinitely. When interest rates do go up, then interest payments on the accumulated debt will increase dramatically, and this is when we’ll have our next fiscal crisis.
- When will interest rates go up? This will happen when inflation takes off, forcing the Federal Reserve to raise interest rates in order to slow down the economy which is the only way to stop inflation. This is exactly what happened in 1980 when inflation rose to 14% before dropping to 3.8% in 1982.
- A big increase in inflation is already very likely, which will be greatly exacerbated by an additional $2 trillion stimulus. Even liberal economists such as Larry Summers and Steven Rattner consider inflation to be a big risk. Some say that its signs are already present.
Conclusion. It is incredibly foolish for the Democrats, now in complete control of the White House and Congress, to act in such a fiscally irresponsible manner. National debt started edging up under President Reagan and has continued to increase with every President since, except under President Clinton who actually achieved a balanced budget for several years in a row (see chart). Since it will be rapid inflation that initiates the above-described damaging sequence of events, every President should be especially careful not to be the one kicking it off.