How the US Government impacts private investing: The Crowding out Effect

Today, we're going to dive deep into this fascinating economic phenomenon that plays a crucial role in shaping our financial landscape.

Imagine you have a dollar to invest. You have a couple of options: you could invest it in a private company, maybe buying some corporate bonds or stocks, or you could buy a government bond. Now, let's say the government needs to borrow a lot of money to fund its activities, like building highways or paying for social programs. To do this, it issues bonds. When the government issues a lot of bonds, it increases the demand for loanable funds in the financial market.

But here's where the crowding out effect comes into play. As the government borrows more and more, the demand for these loanable funds goes up, which in turn drives up interest rates. Higher interest rates make it more expensive for businesses and individuals to borrow money. So, if you're a business owner looking to finance a new project or a family wanting to buy a home, those higher interest rates might make you think twice. You might delay that factory expansion or decide against buying that new house.