I recently listened to a presentation by Prof Garrison. In it, he noted that if the US Govt borrows from:
(1) domestic savers, this can lead to crowding-out and thus higher interest rates
(2) foreign savers, this can lead to an increase in the trade deficit
(3) the Fed, this can lead to inflation
I understand (1) and (3), but I didn’t really follow (2). Can someone explain, or provide a link?
Maybe he meant this:
Foreign savers are lending US dollars. So they first have to obtain some USD. This is eventually done by selling goods/services to the US, that is, by increasing imports (from the point of view of the US), thus increasing the trade deficit at that time period.
In order to lend $10 to the US government, a Japanese citizen would have to exchange an equivalent amount of yen with a US citizen. That US citizen can only spend that yen on Japanese products. Assuming the US citizen does spend it and not save it, then the US would be increasing its imports from Japan. But ultimately that Japanese citizen would be paid back in dollars and would have to buy American products with it (or exchange it with an American holding yen).
Do I have it right?