Crowding out of Investment?
When the government has very high deficits, some economists believe it can cause crowding out of Investment. What does this mean?
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Answer by Levi
The concept is based on the idea that there is only so much money in the world that is available for loans or for investment. So if the government has to borrow a lot of money, then that leaves less money available for investment. Hence, the government 'crowds out' other investment.
Overall, I feel this theory is flawed because there isn't a finite money supply. The government can always increase the supply of money through methods such as purchasing treasury notes, printing more money, changing the reserve ratios, ext. Now, obviously these actions aren't without their own risks, but that's another discussion all together.
I hear many supply side economists arguing right now that part of the economic problems we face today are due to this 'crowding out'. I strongly believe that is not the case. If you look at companies balance sheets today you'll see that they are awash in cash, but are not investing. If there was crowding out, they wouldn't have all that cash, it would all be lent to the government. Instead, they are hording the cash, not investing it, because of economic uncertainty and lack of demand.
But now this turns into a whole supply side vrs demand side economics discussion, which is rather outside of the scope of your original question.
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YFM's £500,000 investment in Dynmark International Limited
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Julian Dennard of YFM Group with Oscar Jenkins of Dynmark
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