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A situation in which a government, especially the U.S. Government, borrows so much money that it discourages lending to private businesses. Crowding out generally occurs because lenders prefer the government as a borrower because it is much less risky and the government is able to pay any interest rate. Thus, when the government is borrowing heavily and lenders have only a finite amount they can lend, it may crowd out private borrowers.
The borrowing of large amounts of money by the federal government—a process that soaks up lendable funds, drives up interest rates, and eliminates from the credit markets many private firms wishing to borrow money from those markets. The government is able to crowd out private borrowers because its credit rating is so high and because it is willing to pay the interest rate demanded by the market. Small firms and companies with poor credit ratings are most adversely affected by crowding out.