In terms of the country’s change in external liabilities, a deficit funded by internal demand for bonds is exactly identical to a government that cuts the deficit to zero by taxing bond buyers.

Bonds, because they require excess reserves to purchase, can never be a “funding mechanism” for spending. In a pegged currency regime, or with fixed exchange rates, they can create temporary policy space into which the issuer can spend, but they never fund that spending directly.

With a sovereign fiat regime and floating exchange rates they simply represent a liquidity swap that pays dividends, swapping liquid reserves that already exist but remained unspent and untaxed for another form of money. They are never “operationally” necessary to the actual funding of currency creation. In such a nation that only accepts debt in its own currency that debt represents the store of value from commerce between the government and private sectors, or the net (after private debt is accounted for) money supply.

A nation that “balances” its budget effectively steals the resources and labor it uses without allowing a store of value for that exchange. The government and private (including foreign) sectors can never both be in net surplus at the same time. The only seven times it was attempted with even moderate success in our history resulted in almost immediate recessions or depressions. Deficit spending by any functional currency-issuing government must be sufficient to retire private debt in a timely manner, satisfy the private sector’s desire to save, and fund economic and population growth. Foreign trade, while representing a drain of demand, is always a zero-sum transaction, as the price of goods is always agreed upon in the private sector.