The Challenger Economy

No one plans for disaster. Disasters occur, when risks are ignored while planning for success. Following the destruction of the space shuttle Challenger, an extensive investigation was conducted to determine what had happened. Eventually, the cause was tracked down to a problem with the O-ring on the solid-fuel rocket. Under certain circumstances, the O-ring would fail, releasing a jet of flame at the point of failure.

As it turned out, this was a known problem. Similar failures had occurred on some earlier flights. But nothing was done.  In fact, that it had failed on earlier flights was seen as a reason not to be too concerned. The O-ring had failed, but without causing other problems.  In short, they had gotten away with it in the past, so there was no reason not to think they would get away with it again. 

The real issue was that when an O-ring failed, it could fail at any point on the circle. Thus, they had pictures from earlier flights that showed a jet of flame from an O-ring failure going harmlessly out from the solid-fuel rocket’s side.  What happened with Challenger was that again the O-ring failed and produced a jet of flame. This time, the failure occurred next to the bracket that secured the rocket to the rest of the shuttle. The jet weakened the bracket to the point that it failed, and the bottom of the rocket broke free from the shuttle. The resulting stresses caused the shuttle to disintegrate.

The O-ring was a problem all along.  But since the shuttle was launched without incident many times, it was not considered a problem until it was. By then, it was too late, and the Challenger was destroyed.

Our economy is now in a similar situation. It is a well-established principle that too many dollars chasing too few goods will cause inflation. History has plenty of examples of governments that tried to solve their problems by printing money. They ended up with inflation or even hyperinflation, where the currency becomes worthless. With our growing debt, which had increased significantly for all recent presidents, concern about inflation had grown. The problem is no one knows exactly what will trigger it. No one knows how much money is too much; how much will lead to inflation.

It is like the O-ring problem, you can turn on the presses and print a lot of money, and often you will get away with it. Politicians have already done this several times. So far, they have gotten away with it. Still, each time they try, the amount created gets larger.  The Obama stimulus package in 2009 was $787 billion and shocked people by how large it was.

Then came the COVID-19 relief bills at $2.2 Trillion under Trump.  Later another $900 billion was added under Trump, and then another $1.9 Trillion under Biden. Now Biden wants an additional $2 trillion for an infrastructure plan. If passed, this would be $7 Trillion or twice the normal federal budget for a year. $7 Trillion is a third of the total GDP. Some want even more. Such large amounts are beyond comprehension.  

Strangely, these large amounts seem to make it easier. It is not real money. It is made up. So those who worried about billions don’t seem to have much concern with Trillions. 

In the short run, things look good. Like a family struggling with debt that just got a new credit card with a large limit, the coming year will probably be pretty good. Then we will reach the limit, and things will be even worse than they were before.

When that happens, we could always print some more money. That will make any inflation even worse; high inflation could become hyper-inflation.  With inflation will come higher interest rates. Higher rates will increase the Government’s interest payment, which will make it even harder to deal with inflation and lead to the temptation to print even more money.  Thus the outlook is not good.

Will all this spending spark inflation?  Given the size, that would seem almost certain, but we are in uncharted territory. Like the O-ring, it will not be a problem till it is a problem.  Like the Challenger, by then, it will be too late.