Crowding Out Effect

Think of the fraternity party where you were smushed in the corner, or couldn't get in the door. Long lines to the snack table. People scrambling for the punch.

You were crowded out of the party.

Now replace all of the large, smelly dudes with banks now proffering high interest rates, and you're the private investor in the middle, hoping to invest money.

Crowding out happens when governments have had an expansionary fiscal policy with the hope of increasing economic activity. This activity leads to the government grabbing funds that might otherwise be loaned to the private sector, and results in higher interest rates.

So who gets nailed in this scenario?

You. Trying to get to the snack table, so you can put your dough to work. But you can’t do it, because you are “crowded out” under a deluge of high interest rates, or costs, of renting the money you wanted to put to work.

So, instead, you just, uh…try not to get elbowed in the face too much.