I just encountered the same problem. Same exact behavior as you. That is, I can start typing and the color of the text is fine and readable. But as soon as there is a space, the background color of the text turns to black, making it impossible to read the text. Or as you said, even pasting in a string value with spaces will cause it to turn black.

I don't have an exact solution to fix the PowerShell terminal, but did find out that I could instead just set the default to be the Developer Command Prompt instead of PowerShell. And that doesn't have the problem.

Obviously you can't run any PowerShell commands, but that is alright for me.