When a government collects insufficient tax, it borrows instead, and the result is a budget deficit. Borrowing takes the form of issuing government bonds, e.g. Treasuries in the US, and obviously foreigners buy some of those bonds. This leads numerous folk to conclude that foreigners to some extent fund the deficit. The flaw in this argument is thus.
If a government fails to collect enough tax, and simply prints money to fund the relevant spending, the effect is inflationary (assuming the economy is already at NAIRU). Thus some form of deflationary counter-measure is needed: that is, demand from DOMESTIC sources must be curtailed.
One such deflationary measure is to borrow from domestic sources, i.e. sell government bonds. But there is a problem here, namely that foreigners will buy a proportion of these bonds. But the latter does not achieve the desired objective, namely curtailing domestic demand. That is, those foreigners, had the bonds not been available would not have spent the relevant money on consumer goods (and hence created demand) in the country that issued the bonds. To that extent, selling bonds to foreigners is a COMPLETE WASTE OF TIME.
Alternatively, those foreigners might in the absence of those bond sales have lent to some other entity in the country concerned. But there again, their switching from lending to those other entities to lending to government does not have a deflationary effect.
To put it figuratively, if foreigners buy $X of bonds issued to fund a budget deficit, government will just have to issue ANOTHER $X of bonds, and hope that DOMESTIC entities buy those bonds.
I argued here that all government borrowing is a farce. That is, government “borrowing” in the sense of paying interest to anyone is a farce. (Non interest yielding monetary base could be construed as a debt owed by central banks to holders of said base, but this so called debt is irredeemable, so it is not really debt.)
The above uselessness of incurring debt to foreigners on which one pays interest is just one aspect of the farcical nature of government debt.
Examples the above “foreigners fund the budget deficit” mistake are thus.
The Peterson Foundation makes the mistake (pages 14-16 & 28). See also the sub-heading here, and the first sentence here.
Afterthought – a few hours after putting the above online….. I’ve just noticed an article published by Warren Mosler today which also makes the above point about the uselessness of government paying interest to anyone. The article concerns a “mini-currency”, the so called “buckaroo”, set up at the University of Missouri-Kansas City. It was set up to facilitate trade between students and the university authorities. As the article puts it, “The UMKC, as well as the students, have failed to identify any public purposes that may be served by having the UMKC pay interest on buckaroo savings, so the 0 interest rate policy remains in place.”