How Severe Will Be The Next Recession?

Financial FAQs

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Graph: TradingEconomics.com

Why are we discussing the possibility of a severe recession when GDP growth is expected to average 3 percent this year, the highest annual average growth rate in several years? Because there is too much federal debt, to put it bluntly.

The very unpopular, all-Republican tax cuts of December, 2017 will add $1.5 trillion to the national debt over 10 years, while cutting approximately $1 trillion in Medicaid, food stamp (SNAP) and other aid to lower-income citizens.

“By 2028, America’s government debt burden could explode from this year’s $15.5 trillion to a staggering $33 trillion—more than 20 percent bigger than it would have been had Trump’s agenda not passed,” said a recent Forbes article. “At that point, interest payments would absorb more than $1 in $5 of federal revenue, crippling the government’s capacity to bolster the economy, and constraining the private sector too.”

Contrary to the claims of the President and his supporters, the U.S. can’t grow fast enough to shed this burden. Trump’s agenda on immigration and trade is more likely to stunt that growth, said Forbes. “This is almost like climate change,” remarked Mark Zandi, chief economist at Moody’s Analytics. “It doesn’t do you in this year, or next year, but you’ll see the ill effects in a day of reckoning.”

In addition, Republicans in control of congress left no funds for spending on badly needed infrastructure repairs and upgrades, the spending that would actually increase overall productivity and future economic growth. Economists calculate such spending would add $1.25 to $1.50 to the GDP for every dollar spent on improving our roads, bridges, electrical grid, airports; not to speak of better water and sewer treatment facilities.

And the Federal Reserve announced today at the end of their FOMC meeting that they are raising interest rates one quarter percent for the third time this year and signaled it will raise the cost of borrowing again in December, ending the long period of accommodative credit policies enacted since the end of the Great Recession. This will constrict credit and reduce consumer demand by raising the cost of everyday borrowing on credit cards and installment loans that are based on short-term rates.

They are doing this at the wrong time with inflation still low, personal incomes barely increasing, and no discernable benefits for most consumers from the tax cuts. The Fed on Wednesday increased its target for its benchmark lending rate to a range of 2 percent to 2.25 percent. Rates are now at their highest level since shortly after the bankruptcy of Lehman Brothers in the fall of 2008.

It will probably be those latest tax cuts and rising debt load that sinks the current 9-year recovery, just as the GW Bush tax cuts erased four years of budget surpluses at the end of the longest growth cycle ever—from 1991-2001—contributing to the Great Recession and record federal debt of today.

This is while a larger federal budget is about to be signed by President Trump with no new taxes enacted to pay for it. It is not how to run a successful business, or country.

Harlan Green © 2018

Follow Harlan Green on Twitter: https://twitter.com/HarlanGreen

About populareconomicsblog

Harlan Green is editor/publisher of PopularEconomics.com, and content provider of 3 weekly columns to various blogs--Popular Economics Weekly and The Huffington Post
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