Awash in Red Ink

Do budget deficits matter in the same way for governments (such as the U.S.) as they do for individuals such as you and me?

There is one important difference between government budget deficits and individual budget deficits that is worth noting.  At both levels, deficits imply borrowing to bridge the gap between income and expenditure.  An individual like you or me will finance this deficit by borrowing from credit cards, banks, or friends and family.  At some point as we get older our creditors will become reluctant to continue to finance continuous deficits.  This is because we have finite lifespans, and our descendants cannot usually be held responsible for our own debts.  As a result, as individuals we are unable to finance our deficits indefinitely.  At some point, as we get older, we will be compelled to start repaying our debts or declare bankruptcy (which will put a brake on our ability to run ongoing deficits). 

An important difference with the government is that the government has no finite "end-date."  As a result, the government can in principle run deficits continuously, as long as creditors continue to have faith in the ability of the government to pay back its debts on an ongoing basis.  This is the sense in which you may have heard politicians say that "deficits don't matter."  However, this depends upon a very big caveat, which is belief in the ability of the government to honor its committments and not default on ongoing debt obligations.  So far, it seems that international creditors continue to have faith in the US government's ability to honor its debt obligations.  This is reflected in the continuing demand for US Treasury Securities/Bonds by international investors.  Lately of course there is discussion of the government's credibility to honor such debt obligations, in the face of unprecedented deficits.  But so far this has not been reflected in the market.  

Note that there are many instances of governments defaulting on debt obligations.  In the past, Argentina, Brazil, and recently Iceland, have defaulted on international debt obligations. 

  

How does the U.S. government "finance" its deficit?  What about a country such as Ukraine, or Greece?

While the US government is able to finance its deficit via the sale of US Treasury bonds, the problem for many other countries, such as Ukraine or Greece is that international investors are much less keen to buy their debt.  Would you buy Ukrainian or Greek Treasury bonds?  As a result these countries find themesleves in a fiscal strait-jacket.  Having been hit by the global downturn, they find the need for deficit financing to engage in fiscal stimulus, but without the easy access to funds that the US government has.  A last resort for such countries is the International Monetary Fund.  The IMF is a lender of last resort for many countries that need deficit financing but are unable to quickly raise the needed funds.  This is an important function of the IMF, but countries are often reluctant to borrow from the IMF because it comes with strict conditions that countries may find onerous.

In addition, if the US runs increasing budget deficits, it absorbs most of the available liquidity in international capital markets, making credit rationing an even more acute problem for smaller countries. 

The outgoing Czech PM publicly criticized the US budget deficit last year.  The Czech Republic is a relatively "small" trading partner of the US.  Why should such a country be concerned about the US federal deficit?  Later on in the same speech, the Czech PM said something to the effect that the US "has it easy, because they can sell Treasury bonds whenever they want."  This reflects the frustration that many countries feel when they compete for loanable funds with US Treasury bonds.

Virtually all OECD countries are projected to run large government budget deficits in the next year.  If the rich countries (OECD members) run large budget deficits, they will absorb much, if not all, available "safe" liquidity in the global capital market.  This will result in an acute shortage of funds for other less prominent countries which also have deficit financing (stimulus) needs.  This could strain the resources of the IMF and prolong the recovery for many such countries.