As readers of this blog know, I am optimistic about the long-term future of our country, because of our many fundamental strengths. But I am also quite concerned about the effects of the high rate of inflation we are now experiencing, which is, first of all, driving up the cost of everyday living.
In the near term, the next few years, inflation is going to cause even more pain for millions of Americans. Consider:
- What inflation costs workers. In 2021 inflation reduced real wage gains by 2.4% (see chart).
- Mortgage rates surge. The average mortgage rate is now 6.7%, the highest level since July 2007 (see chart). This adds pressure to the already cooling U.S. housing market. Many would-be home buyers have given up, while many existing homeowners have become reluctant to sell.
- Likelihood of recession. According to the economist Larry Summers, there is a very substantial likelihood of a recession over the next two years. This is suggested by the current inflation rate of 8.3%, along with the current low unemployment rate of 3.7%, and the clearly stated goal of Federal Reserve Chair Jerome Powell to raise interest rates as high as necessary to bring the inflation level back down to the desired 2% level.
- Interest payments on the national debt. Rising interest rates are already dramatically increasing interest payments on our public debt of $24 trillion. They hit $63 billion in August 2022 which computes to $756 billion on an annual basis. Soon interest payments on the debt will exceed $1 trillion per year from the current level (in Fiscal 2022) of $400 billion per year. Because of inflation, social security payouts will increase from $1.2 trillion per year to $1.3 trillion. Federal healthcare costs (Medicare, Medicaid, etc.) which amounted to $915 billion in fiscal 2022, will grow by $163 billion next year. If we do fall into a serious recession, federal tax revenue will erode.
Conclusion. Workers falling further and further behind in the cost of living, prospective home buyers unable to afford to buy a house, a serious recession substantially raising the unemployment rate, and finally, huge increases in financing our growing debt coupled with recession-induced shrinking tax revenue, all these events will be very harmful to the economy. Will this likely combined scenario put us into a “doom loop” of decline or “just” mire us in stagflation, draining growth potential from the national economy? Either way, the whole process will be painful for tens of millions of Americans.