The Madness of Crowding Out


  • The Madness of Crowding Out
  • Foreign Investors Warm Up To Chinese Bonds
  • Trade Deadlines Are In Sight

I will be working in Asia for most of the coming two weeks, and I am very much looking forward to it. What a great time to dig more deeply into events on the Korean peninsula, and to get a Chinese angle on trade negotiations with the United States. I am also looking forward to bulgogi, xiaolongbao, nasi lemak and other regional delicacies.

The cities I will be visiting are among the most densely populated in the world. Any of you who have been to the large cities of Asia are familiar with the crowds; the energy that they generate is exciting, and invites you to tag along. Visitors to the region must learn to navigate through the chaos.

Crowding can be a problem, however, when it comes to credit. The dramatic increase in public borrowing over the last decade has absorbed copious amounts of capital that might otherwise have been used to finance spending in the private sector. If government debt grows too much, businesses and consumers seeking loans can find themselves "crowded out." Impaired access to credit is harmful to economic growth.

To date, there is little evidence that worthy borrowers are experiencing undue difficulty in accessing capital. But as the credit cycle turns and worldwide fiscal positions worsen, crowding out may become a bigger issue.

Classical economic theory holds that households apportion funds to spending and saving based on their need for income currently and in the future. This allocation can be influenced by the level of interest rates; higher yields will typically incent higher levels of investment. Banks lend the resulting pool of savings to those who want to borrow; credit taken by the public sector reduces the amount available to support business growth.

Global public debt has more than doubled over the past decade. A good portion of this increase reflects government efforts to put floors under their economies in the wake of the 2008 financial crisis. At first, debt-driven deficit spending replaced private demand; further on, governments expanded their use of leverage as households, companies and financial institutions de-leveraged. Quantitative easing programs from central banks absorbed a good fraction of the incremental sovereign debt supply, which kept interest rates low and credit available for those who wanted it.