Something that occurred to me as I was writing my post on the stimulus package yesterday and that ties in rather neatly to my post at OTB on the Asian economies is that we shouldn’t limit looking for a crowding out effect to our own shores. If the Congress enacts its mammoth stimulus package (as undoubtedly it will), the package will need to be financed somehow. Raising taxes would negate whatever positive impact the bill might have. It’s got to be financed by borrowing. Not only can financing the U. S. public debt crowd out domestic borrowing that companies here need to grow, it may well crowd financing other countries’ public debt that they need to keep their own economies going.
How exactly does it “crowd out” private borrowing again? The creditors – governments, banks, etc – are choosing to purchase these extreme low-interest bonds instead of presumably other extreme low-return private investment opportunities. It’s not as if these people are going to say, “Hmm, I guess I couldn’t put $1 billion into US Treasury Securities, so I think I’ll go and put them into mutual funds.”.