David Leonhardt has a great catch from a recent Larry Summers speech up at the Times Economix blog today. In the speech, Summers made the following observation:
… even with the dramatic action of the Treasury and the Federal Reserve, the total level of borrowing in our economy is actually lower than in normal times, not higher. Accordingly, the volume of securities that have to be absorbed by market participants is lower, not greater, than normal.
Leonhardt translates:
Even with the big recent increase in government debt, the total amount of debt generated by the United States economy has not been growing especially fast. That’s because the amount of debt being taken on by households and companies has been falling, as they have cut their spending during the recession. Thus the amount of American debt that investors (“market participants”) must buy has not been growing very fast, despite the government’s spending of billions and billions of dollars in response to the financial crisis.
He notes that "total nonfinancial debt grew 6 percent in 2008 and has been growing at annual rate of less than 5 percent this year. It grew at least 8.1 percent every year from 2003 to 2007." Now, obviously, if the government is still borrowing in huge quantities once businesses and consumers start borrowing more heavily, then the supply of debt could start to exceed investors' appetite for it, which would drive up interest rates. On the other hand, since borrowing is related to overall demand, it makes sense for government to step in and borrow more than usual at a time when businesses and consumers have scaled back. It's the basic logic of Keynesianism.