thanks!
Government spending increases resulting in higher interest rates (holding monetary policy constant) as debt piles up which makes the private sector less likely to borrow due to the high rates.
Think of a company that spends too much on R&D and they have widening losses in EPS, their stock will go down, and borrowing costs via the YTM on their debt will increase as their situation looks worse, which will make it less able for them to borrow since the punitively high interest rates dampen the benefit of an increase in leverage.
The available savings is being diverted to fund Government spending . With the drying up of private capital , private borrowing shrinks as the pie for private borrowing is smaller.
You see the economy is a series of tubes. If the government is filling the tubes with overspending, there is less tube-space for private borrowing.
thanks for all the replies! to sum up,
Gov spending goes up -->
need more debt to fund spending -->
interest rate goes up -->
discourages private lending
Discourages private borrowing (rather than lending).
oops thanks teehee