The focus groups must have found that saying that much of the government debt is held by foreigners got people really scared, because the deficit hawks keep citing this fact. Ruth Marcus does it today in the Post, telling readers that: "When the economic crisis hit, the country enjoyed the fiscal flexibility to respond with massive spending to counter the downturn. Next time, our capacity to whip out the national checkbook may be constrained by foreign creditors." I suppose that the sentence would sound less scary if it read: "Next time, our capacity to whip out the national checkbook may be constrained by creditors." Of course whether the country as a whole (not just the government) borrows from abroad depends on our trade deficit, not the budget deficit. If the country had the same trade deficit, but ran a balanced budget, then China, Japan, and other surplus countries would be buying up private assets like shares of Microsoft and Verizon. This might be a concern because future earnings on these shares will be going to people living abroad rather than people in the United States, leaving a smaller share of domestic output for future generations living in the U.S.. If we are worried about evil-doing foreigners doing bad things to the U.S., they can do it just as well by holding private assets as government debt. (Of course, any day of the week, these evil-doers could sell their Microsoft stock and buy up government bonds, if that is what they decide to hold.) So, the foreigners holding government debt story is pure nationalistic garbage. There are serious arguments that can be made about the size of current and future deficits, but this is not one of them. If someone is concerned about the trade deficit, then the discussion should be about the value of the dollar. Neither Marcus nor any of her budget hawk colleagues at the Post seem to have much interest in that discussion. (They didn't have any interest in discussing the housing bubble either, even though its collapse added trillions of dollars to the debt.)
--Dean Baker