Government Borrowing Does Not Mean More Borrowing

TW: There has been much fretting recently about Treasury sales and how much debt governments are putting into the market. This fretting to a certain degree misses the point that a couple of years ago the same quantity of debt was being pushed but by private borrowers.

The above is not the prettiest graph but it makes a point. Total U.S. borrowing- public and private- has not changed much during the Great Recession. One our borrowings from "foreigners" have not increased as a result of the increased government spending. Two, imagine what would be happening to the economy if total borrowing had suddenly plummeted from the $2 trillion level to far below $1 trillion? That is how depression environments are created.

The government has stepped in to provide liquidity and spending when private demand collapsed. For sure the government will have challenging calls to make when transitioning interest rates up and borrowing down. There will be huge controversy about how soon to raise interest rates- some will want them low to facilitiate economic growth others higher to ward off inflation.

Our longer-term fiscal challenges remain. But the chart above helps outline why temporary policies are crucial to creating a longer-term solution.

From Brad Setser at Council on Foreign Relations:
"...As households and firms rediscover their animal spirits and start to borrow more, the amount the government borrows needs to fall...More immediately, while the US is borrowing less from the rest of the world, it is still borrowing from the rest of the world. A smaller trade deficit is still a trade deficit, and financing that deficit requires ongoing inflows from the rest of the world. That means that some creditor needs to increase their exposure to the US...."
http://blogs.cfr.org/setser/2009/05/31/more-government-borrowing-doesnt-necessarily-mean-more-total-borrowing/