A Contrary View - Government Borrowing Will Not Crowding out the Private Sector

Here's a tidbit from a well-reasoned 2009 predictions post over at the Accrued Interest blog.

What about Treasury supply you ask? Won't the massive debt load eventually push rates much higher? While acknowledging that supply is an obvious negative for prices always and everywhere, as it is, Treasury supply is clearly not overwhelming demand. The 3-year and 10-year auctions from last week went quite well.

Besides the theory that government debt crowds out private investment doesn't hold water right now. Private lending ain't happening in areas where the government isn't subsidizing. In essence, the Treasury is leveraging because the private sector can't.

Eventually, the Fed's programs will result in much higher inflation, and thus Treasury rates will rise substantially. But I think this is a year or more away, too far away to recommend a short.

While it seems contrary to my normal debt-hating rants, I would agree with this. In the short run, over a year or so, there will be very few businesses expanding, requiring large loans to finance their growth. Unfortunately, debt, like diamonds, is forever. Or practically forever since we never seem to plan to pay any of it off. While borrowing money right now won't crowd out the private sector because the private sector has no hunger for money, except those that need it to sustain operations like the plumbing contractor example in my previous post, if you look beyond 2009, it will starve the rest of us for cash.

Not looking beyond the short-term is exactly what got us here. Not good.

Missing from this analysis is what all of this borrowing will do to the rest of the world as they try to borrow like mad, too.