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January 9, 2009

Is "Crowding Out" Overdone?

Lots of people, myself included, persist in chattering about "crowding out" in global debt markets. It is, of course, the idea that when too many people all go to global debt markets at once, some others won't have easy access, whether that's corporate borrowers, some smaller countries, etc. The result is higher rates, plus even the possibility of insolvencies.

For a contrary view, however, consider the following comment from BCA today:

Worries about the government "crowding out" private sector borrowing are misplaced given that there is unprecedented private sector deleveraging underway. Private sector savings are rising (in the U.S. and around the globe), underscoring that there will be no shrotgage of capital to finance increased government debt without pushing up interest rates. No doubt "crowding out" would be a problem if the economy strengthens, but this is a long way off and the need for fiscal stimulus will disappear once the economy finds traction (whether fiscal policy will reverse course at that time is another question). As we have noted, history shows that bond yields fall when countries suffer a real estate/banking crisis and economic recession …

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