This is the third post in the Federal Debt Discussion series.  Previous articles discussed the The Scale of the Federal Debt and The Scale of the Federal Deficit.

The Federal Government borrows money for a lot of different reasons.  Some of it goes to funding operations.  Some of it is to balance cash flow with expenses.  Some of it is even intentional to help stimulate the economy and provide a short term push to avoid or get out of recessions.

Regardless of the reason, the total amount of debt has risen over the years.  It has varied some as a ratio of the GDP of our country.  Good or bad, that has been our history.

Debt Markets

When the US government wants to borrow money, it has to go to the same global markets as corporations.  Yes, global.  With advancement in technology and decreases in regulation of money flows, the markets to borrow money are now truly global in size.

Due to the perceived nature of risk, US government bonds and bills are seen as among the safest in the world.  The US has not defaulted on its obligations and is not expected to default either.  All of this, despite have a fiat currency and not one backed by an asset such as gold.

When the US government goes to these markets, it announces how much debt it will be issuing and different entities - individuals, companies, funds, and even countries - bid for the debt.  The highest bid wins, and the higher that bid, the lower the effective interest rate will be.

Those groups that win those auctions get what they want - a secure place to put their money that will pay them back at what is (hopefully) above the rate of inflation.  The rest of the bidders have to find someplace else to put their money to work.

That someplace else is generally in corporate debt.  That is where the problem lies.

Reducing Corporate Borrowing

The available money in the global debt markets is essentially fixed at any given point in time.  It will change significantly over time as to appeal of the stock markets wax and wane and inflation fears ebb and flow.  Other factors have an impact too.

There are a couple of constants.   First, there is less money available to be loaned out than there are requests for it. There are always disappointed groups in the market.  It may be because they could borrow less than they wanted or because they were able to borrow but not on the terms that they wanted.

Second, and more important, is that government borrowing reduces corporate borrowing.  On a very close to a dollar for dollar basis, any money that the US Federal Government chooses to borrow is no longer available for corporations to borrow.

This means that companies looking to expand operations, modernize plants, and purchase land and equipment are unable to do so.  Either they must borrow less at higher interest rates or reduce their plans for expansion.  This is the

The Production Problem

Government spending does not generally translate into new jobs and increased productivity like private investment does.  Part of this will be the different nature of governments and businesses.  Businesses have to be good spenders to get high value for their expenditures in order to exist from year to year.  Governments do not.

When governments borrow money, they reduce corporate borrowing.  The reduced corporate expansion plans result in a slowdown in economic growth due to fewer jobs being produced and productivity not rising as fast as it otherwise could.  Likewise, reducing the amount of government debt helps to encourage corporate growth.
This occurs because government spending does not create jobs and increase productivity like corporate spending.  Our government does not spend our money as efficiently as we do.

Conclusion

As I continue to investigate the impact of the Federal spending habits on our economy, specifically the deficit and debt, it is becoming clearer that the negatives of deficit spending outweigh the positives.  Honestly, the expectation was that the increased money supply created by deficit spending would have a multiplicative effect resulting in a positive impact on the economy.

Instead, what I am finding is that the impact is not as great as expected.  Government spending has less impact than private.  Maintaining significant national debt levels results in greater deficit spending and more borrowing from the future than what can be offset by the reduced value of the dollars that will be paid back.  So, we are stealing from our future prosperity by spending the money now.  Eventually, without a change in mindset and policy the bill will come due and the cost will be significant.

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