Friday, December 12, 2008

Crowding Out

I have mentioned before how I believe that the massive increase in U.S. borrowing will crowd out private investment, and thus hurt economic growth. Something that I hadn't thought of was how U.S. borrowing will attract foreign capital and force other governments to raise their interest rates to compete with the U.S. Our borrowing may hurt their economies as well.

From the Financial Times (HT: Objectif Liberte):

Investors shunned one of the most liquid and safest assets in the world on Wednesday as a German bond auction came close to failing in a warning sign for governments attempting to raise record amounts of debt to boost their slowing economies.
The auction of two-year bonds saw only just enough bids to meet the €7bn ($9bn) the government wanted to raise. This was almost unheard of before this year as investors typically clamour to buy these securities.
However, the prevailing view among analysts is that problems in raising debt so soon after many governments have announced fiscal stimulus programmes to revive their economies are a worrying sign with vast amounts of supply due in the coming months.

Governments in Europe are expected to issue more than $1,000bn next year, while the US is expected to raise up to $2,000bn. With up to $2,000bn in government-backed bank bonds also expected next year, analysts say the market faces grave dangers of being “crowded out” as some governments struggle to raise debt or have to pay much higher yields.
A banker said: “They couldn’t get the price they wanted. There is a lot of competition in this space, and they were having to offer big premiums to interest investors. The fact it was year-end didn’t help.”

No comments: