Something very important has been missing from the debate about the fiscal stimulus package. There are two really good reasons to oppose the 800 pages of the Obama-Reid-Pelosi bill.

First, it’s got be to just about the most hasty and poorly thought-out piece of legislation ever to come out of the US Congress. (Isn’t it ironic that it also happens to be the biggest expansion of government spending ever?) This bill is so full of waste, earmarks and pork-barrel spending that Obama will have to use all his charm and deception to blow it past the American people.

Second, and this is what you hear from a lot of Congressional Republicans, the bill expands the Federal deficit tremendously. It’s being suggested by many sharp observers that global investors (like the Chinese) will be unwilling to fund this stimulus package, and will demand much higher interest rates on US debt.

Not quite. This deficit will be a lot easier to fund than many people think. It’s what comes later on that we have to worry about.

The thing that many people miss in the debate is the role of private borrowing. It turns out that credit formation in the private sector went into reverse in 2007, and the decline continues to this day. In fact, it will probably continue for a long period of time as financial assets deflate and housing values keep falling.

On a net basis, the private sector is paying off its debts rather than borrowing more. But there’s been no measurable reduction in global demand for debt securities. That gives the government the opportunity to greatly step up its borrowing, at what appear to be very low interest rates.

The trillion-plus dollar deficits of the Obama years will add greatly to the public debt of the US (now at about 40% of GDP), but will probably NOT measurably increase long-term interest rates anytime soon. The Obama stimulus plan, on top of already-huge deficits caused by the recession, should push the public debt up to about 60% of GDP by the end of next year. After five years, it’ll probably be about 100% of GDP.

To repeat, this isn’t going to be accompanied by any easily-noticeable distress. In fact, the additional government spending will increase reported GDP and reduce unemployment in the near to medium term. President Obama will take credit for what will appear to be a success.

The distress will come later on. The government’s share of total US indebtedness will NOT be able to fall. That’s because it’s in the nature of government spending that it’s not efficient and does NOT give the economy the equipment to produce at higher levels. (The only way to achieve that is to increase the real rate of return on private investments, which no one is talking about at all.)

That means the aggregate productivity of the US economy will not rise as a result of all the government spending. The private sector will need to start investing again, if we’re to replace the share of aggregate demand that the government is creating.

But after a few years, when it’s time for that to happen, we’ll suddenly notice that private sector borrowing has no room to come back. The government will be soaking up all the available capital, and real interest rates will be extremely high. (Remember, in a deflation, even a 4% interest rate can easily be too high to catalyze private investments.)

That’s when we’ll all realize that the government is the economy and the private sector won’t have the ability to borrow and invest on a large scale. This will depress consumption and investment permanently.

What could forestall that outcome? Aggressively reducing taxes on business income and capital gains, right now. Will that happen? In your dreams.

Welcome to America’s version of Japan’s lost decade.