How does internationalizing the debt reduce crowding out?...

Key Concepts

Crowding Out Effect

A phenomenon in macroeconomics where increased government borrowing leads to higher interest rates, which in turn reduces the amount of funds available for private sector investment. This happens because government debt competes with private investors for the available pool of savings, potentially hindering economic growth by raising the cost of borrowing for businesses.

Internationalizing the Debt

The strategy of issuing government debt in the international financial markets rather than relying solely on domestic investors. By borrowing from a broader set of investors globally, a government can lessen the demand pressure on domestic financial resources, thereby mitigating the crowding out effect on private investment.

Global Capital Markets

The network of international financial markets where funds are raised and invested across borders. In the context of debt internationalization, accessing global capital markets allows governments to benefit from a larger and more diverse pool of capital, which can help maintain lower domestic interest rates and support more stable economic conditions.

Transcript

00:01 Hey guys, and welcome to another economics example where we're going to be looking some more into fiscal policy, specifically talking about national debt in this example.

00:11 So for this, we're going to ask, is national debt good or bad? and unfortunately, that answer is not so simple.

00:21 It can be both good and bad.

00:23 So in the case, national debt is good, you know, when you're incurring budget deficits in order.

00:32 To pay for valuable things that will, you know, increase your economy's gdp in the future.

00:43 So oftentimes things like infrastructure are completely worth, you know, going into a budget deficit for as long as it's not a crazy budget deficit.

00:56 But when we're talking about raising money through bonds, a problem can arise.

01:07 That is called the crowding out effect.

01:11 So this is where national debt can actually be bad.

01:17 And the crowding out effect is when, so when you're talking about bonds, the government is competing with the private sector for bond buyers.

01:30 So to make their government bonds more appealing, what they might do is raise the interest rate.

01:39 So if they raise the interest rate, too high, you know, when they become too appealing to consumers, then you have the problem where, you know, money is leaving the private sector because people just want to buy government bonds.

01:58 They don't want to buy private bonds.

01:59 And that can be very bad for your investment...

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