Merrill Lynch: No 'Crowding Out' Yet

By John S. McClenahen Corporations are still concentrating on repairing their balance sheets and not significantly increasing their demand for credit. And the need to finance the federal budget deficit, now approaching $300 billion, has yet to crowd companies out of the capital markets. But the situation is almost certain to change at some point. "The risk in running $300-plus billion [federal budget] deficits in the next several years is that at some point they will bump against competing demands for credit from the corporate sector," notes Kathy Bostjancic, a trading desk economist at Merrill Lynch & Co., New York. "The problem with escalating fiscal deficits, as we saw in the 1970s and 1980s, is that they are in fact very difficult to reverse, even when the economy gains momentum," she adds. The bottom line: "There is no corporate investment for the increased government borrowing to 'crowd out' -- at least just yet."

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