The process is as follows:
The Government might be able to borrow funds from abroad but for that it needs to set attractive terms for bond buyers. This is especially true for a Government which is already overburdened with debt. So as the emerging economies recover and inflation gets higher, these countries will demand much higher interest payments on the bonds. No one would love to buy bonds which give negative returns (when adjusted for inflation).
The U.S. Government will thus be forced at one point of time to increase rates on bonds and this will lead to interest rates going up in general. Higher price for money again impacts the private sector as it might not be able to borrow funds (or borrow to the extent it needs) for its expansion.
Thus, even by selling bonds to other countries, the Government might impact the provate sector spending through higher interest rates. In order to keep interest rates low, the only option the Government will have is to monetize debt (print money).
Impact of Debt Monetization on the Private Sector
Debt Monetization is the best way to cause spiralling inflation and also accelerate the demise of any currency. Thus, debt monetization might ultimately lead to the same higher interest rates or a bigger crisis for the financial and economic system as a whole.
Does Government spending only lead to Negatives?
One might be wondering at this point of time that is there any positive associated with Government spending and if not then whey are Governments creating huge deficits which ultimately will lead to no benefit for anyone.
The answer is that Government spending is not something which always spells disaster. But the following things have to be taken into consideration.
- What is the Government Spending directed towards? In the cae of U.S, the Government spending is directed towards encouraging consumption instead of encouuraging capital formation and private fixed investments. The Government is trying to find the solution to the problem by using the problem itself as the medicine. Thus, in my opinion, a large part of the Government spending is misdirected and that will not benefit the economy in a big way. The only thing it can do is to artifically support the economy.
- The Government also needs to consider how much leverage it alread has.