No, this is false. The crowding-out hypothesis relies on the ‘loanable funds’ model, which is at odds with how banks lend in reality. Banks are not reserve constrained (and they are in fact flush with reserves, which is why the Fed’s support rate on excess reserves is effectively the overnight bank rate now). This is also why we don’t observe interest rate increases commensurate with the expansion of government debt.

There is a version of ‘crowding out’ that is real though, which is potential crowding out of real resources by government spending. This is entirely different than the financial crowding-out you describe in the article, which is a myth that persists in the face of all evidence.

Corporate accountant and former auditor with degrees in philosophy and accounting.

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