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Is it possible for U.S. federal budget deficits to crowd out  investment spending in...

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xnoe323x | Student, College Freshman | Salutatorian

Posted November 29, 2012 at 3:20 PM via web

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Is it possible for U.S. federal budget deficits to crowd out  investment spending in other countries?

For example, how could German or British investment be hurt by large U.S. budget deficits?

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted November 29, 2012 at 3:34 PM (Answer #1)

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In order for the US federal budget deficit to crowd out investment in other countries, it would have to raise interest rates in those countries, thus reducing the ability of businesses in those countries to borrow for the purpose of investing.  In today’s globalized world, this would be possible.

In today’s world, capital flows rather freely across borders.  People from almost any country can invest in American government debt.  Using your example, people in England and Germany could buy some of the US’s debt.  The more the US runs large deficits, the more US debt investors can buy. 

If investors around the world spend their money buying US debt, there will be a lower supply of money available to be lent to other borrowers.  This will cause interest rates to rise around the world.  When these interest rates rise, a crowding out effect can occur.

The supply of funds for borrowing in the world today is fairly globalized.  Investors can put their money wherever they see the best combination of risk and return.  If the US runs a large enough deficit and if investors think the US is a good place to invest, they will buy up US debt.  Interest rates will rise around the world and crowding out can occur.

 

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