The IMF
It is a maxim of current economic orthodoxy that governments compete
with the private sector on a limited pool of savings. It is considered
equally self-evident that the private sector is better, more competent,
and more efficient at allocating scarce economic resources and thus at
preventing waste. It is therefore thought economically sound to reduce
the size of government - i.e., minimize its tax intake and its public
borrowing - in order to free resources for the private sector to
allocate productively and efficiently.
Yet, both dogmas are far from being universally applicable.
The assumption underlying the first conjecture is that government
obligations and corporate lending are perfect substitutes. In other
words, once deprived of treasury notes, bills, and bonds - a rational
investor is expected to divert her savings to buying stocks or
corporate bonds.
It is further anticipated that financial intermediaries - pension
funds, banks, mutual funds - will tread similarly. If unable to invest
the savings of their depositors in scarce risk-free - i.e., government
- securities - they will likely alter their investment preferences and
buy equity and debt issued by firms.
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