2009-05-28

Crowding Out has arrived

I remember learning the crowding out theory in economics class, which says that government spending and borrowing "crowds out" private spending and borrowing. For the longest time, however, there was little evidence that government borrowing was crowding out private borrowing, probably due to the fact that the U.S. was in the midst of a multi-decade credit expansion. If there was an effect, it was muted.

No longer. Brad Sester shows why Treasury rates are rising now—central banks reduced their demand for long-term Treasuries, leaving private borrowers to pick up the slack.
Over the last 12 months of data (data through the end of April, May data will be out soon), the US issued $735 billion of notes, bonds and TIPs.* In calendar 2008, the increase in supply of longer-term Treasuries was about $400b – a large sum, but easily within the realm of historical experience.

Yet even as the supply of notes has increased, central bank for longer-term Treasuries for their reserves has fallen. Central bank demand for longer-term Treasuries – on a rolling 12m basis – has been trending down since August 2008.
It's a situation that will only grow worse in the coming months and years. ProsShares Ultra Short Barclays 20+ Year Treasury (TBT) is one of the few ways to profit from the trend.

Here's an article discussing potential crowding out in China.

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