Why it would not matter if no one wanted to 'fund the deficit' by buying government bonds.

Let us consider the mechanics of government spending and borrowing. In a fiat currency system when governments spend numbers are added to recipient bank reserve accounts at the central bank. The money in reserve accounts earns little if any interest. When governments sell bonds what happens is that money in reserve accounts is moved into special interest-bearing accounts. If no-one wants to buy the bonds the money simply stays in the reserve accounts, earning no interest. Does this mean that the government is broke or will default? Of course not. In fact they are better off as they don't have to pay any interest. Government bonds are a benefit to the public and a cost to the government. The requirement to sell bonds is not needed to fund spending. Typically it is needed to execute monetary policy, as it enable central banks to target interest rates that banks pay to lend reserves to each other. When there are excessive reserves in the banking system and base rate is very low, as is the case now, there is no longer a need to sell bonds to execute monetary policy. If the economy recovers and starts growing rapidly, and it is felt necessary to reduce reserves then there are other ways of doing it that don't require the sale of new government bonds. The central bank could sell some of the bonds that it has purchased through the quantitative easing programme. The government could reduce the deficit or even run a surplus by increasing taxes and reducing spending. In fact this will happen anyway as the economy grows since tax revenues would rise and welfare payments such as unemployment benefits etc would fall.

If there is no need to worry about about our government being able to borrow to finance spending why is there so much anxiety expressed about the deficit? It is all down to mythology. There is a self-imposed rule that governments sell bonds equal to the value of the deficit, which gives the appearance that governments are financing the deficit. To implement this rule government have an notional account at the central bank. When tax payments are made this account is marked up by that amount. Similarly, when bonds are sold the account is also marked up. When governments make payments this account is marked down. Finally this account is not meant to fall below zero. These are all rules that the government imposes on itself to support the myth that government spending needs to be funded by taxes and borrowing. They can easily be bypassed or changed as the government enforces them. The myth is sustained because of the view of those who know better that the public and political leaders need to have a 'fear of bankruptcy' in order to convince them to raise or pay unpopular taxes and to restrain their impulse to spend excessively. It is analogous to the idea that religious belief in heaven and hell are needed to encourage virtuous behaviour. Myths can have tragic side effects. Suicide bombing is one example. The entirely unnecessary waste and misery induced by misconceived fiscal austerity is another.