Crowding out is already here, it's just not evenly distributed

We can meet Uncle Sam's borrowing needs, no problem. Private sector doesn't need no stinkin' debt, anyways

Random Walk was going to do a 2024 lookback, but got so tired of reading everyone else’s 2024 lookback, that I figured I’d hold it for a few weeks, when 2024 lookbacks are in short-supply.

Happy New Year, everyone. But otherwise, this is business as usual.

• Bridgewater says (in not so many words) ‘crowding out’ is the new normal, and it’s fine so far

• good news! rates are going back to [the pre-GFC] normal

• tremors in the treasury markets

• everyone wants banks to play it safe, until someone loses a dealer

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Crowding out is already here, it’s just not evenly distributed

Bridgewater published some research to the effect of “crowding out is already happening.”

“Crowding out” refers to a zero-sum scenario where Uncle Sam’s rapacious appetite for debt, “crowds out” private sector borrowers. It’s the stuff of debt scolds, and until recently, the dustbin of history.

In Bridgewater’s words, “despite higher government deficits, total borrowing is about average.”

Uncle Sam’s gain, is Finance Bro’s pain

The reason that total debt has stayed about average, while government debt has ballooned, is because private borrowers have borrowed correspondingly less (because higher rates have made it prohibitively costly to do so).

In chart form, the growth of Government borrowing has been offset by a slowdown in private sector borrowing:

Bridgewater

Total credit creation is growing a bit faster than the norm, but government debt has grown ~2X the rate of prior, while private debt ~50% less.

Or, to look at it another way:

• Public borrowing has never been higher:

  

• While private borrowing has never been lower:

  

So, you see, Uncle Sam’s gain, has been Finance Bro’s pain.

To be fair, Bridgewater’s point is that the private sector has mostly handled this relatively debt-free life with aplomb (which is not the scenario envisaged by the “crowding out debt scolds”).

Or rather, if you’re thinking about the total supply and demand for debt in the aggregate, then things are relatively in balance. Sure, the government has demanded more, but there’s been no shortage in supply, because private cos are demanding less.

Borrowing costs returning to pre-2008 normal

Now, here’s where it gets a little interesting.

Well, it was interesting before, but now it’s even more interesting.