Will Private Borrowing Crowd Out Uncle Sam?

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So Microsoft is going to raise money on the debt markets to buy back their stock, which they consider underpriced.  This is a popular move when debt is cheap, and with Windows 7 coming, which by all accounts is what Vista should have been, Microsoft probably has good reason to think their stock ought to improve.



On the other hand, these are troubled times in markets.  The markets are heading back to a level that implies, many people think, implausibly high P/Es.  The P/Es on the broader market look all right right now--but only if you think that we will return to the record profits of the last few years.  This seems unlikely.

Nonetheless, this is a good sign that the credit markets are unlocking.  Which is good news for everyone--except, possibly, the United States government.  The reason the government can borrow money so cheaply right now is that no one wants to lend to anyone else--too risky.  So investors, particularly fund managers who have to stash the stuff somewhere, have been parking it in government debt, driving prices up to the point where the securities offer little to no return.  If they start lending to companies again, that will mean higher interest rates for all the money the administration is borrowing.  That, in turn, is one of major reasons that Congress and the administration can act as if the deficits don't matter--right now, they don't.  It's practically free money.

There are other reasons to worry about our ability to borrow, more on which later.  But that's a good place to start.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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