What is the US trillions dollars debt consisted of?

Question

Does the us finance this through bonds?

how does it work?

Answer 1

Mostly bonds. The way bonds work is like this: I sell you a bond for, say, $100 today, with a contract that I will pay you $110 in one year. So, it is like a 10% loan.

Every year the US sells some bonds, and retires (pays off) others. Most years we sell more, increasing the overall debt load (i.e. the total amount owed), but in the 90's the load went down for a couple of years.

Bonds depend heavily on the reliability of the issuer. If you have a repuation for not paying bonds on time or in full, people will be less likely to buy them from you, and you'll have to promise higher amounts to entice people. The US Government has been very reliable with its bond payments, so it can get money with a lower interest rate.

The bond market also gives countries with lots of cash, like China, a place to put their money. It is sort of like a big, worldwide money cycle: we buy tons of goods from China, China then has tons of cash, China buys bonds from the US Government, the US Government then has lots of cash. The US Government spends the money, which eventually gets into peoples' pockets, and we go out and buy more goods, many from China... and so on.

Answer 2

Steven is correct, I'll add that what happens is on a regular basis the US Treasury holds a public auction to sell new bonds. The initial interest rate is determined by how much money people are willing to spend on a bond that pays a stated, fixed amount of interest each period. (The interest payment from the government is fixed, so the price of the bond itself varies depending on the market).

Depending on the length of time till these debt instruments mature and are to be redeemed, they are called bills, notes, or bonds. But they're all really just bonds.

When you buy a US bond, you can then turn around and sell it, you don't have to wait years to get it redeemed. There is a huge public aftermarket for trading these bonds, which is what the business news is talking about when they report how the treasury bond market is up or down any given day. Foreign investors and corporations are allowed to join in the auction too, which is why you often hear news about how we owe money to China or Japan or whoever (which is no big deal at all, despite the demaguguery).

See the Bloomberg link below under the US Treasuries section, you'll get a sense of how there is an aftermarket for these things.

The fed government rolls over debt over time -- as some batch of old bonds is about to be redeemed, the Treasury will have a refunding auction, selling new bonds to raise the cash to redeem the old bonds. That's very beneficial now, as current interest rates are lower than interest rates from 10 and 30 years ago -- the new replacement debt is cheaper than the older debt. This rolling over is easy to do, and this is the reason that the US national debt WILL NEVER actually be paid off, there would juts be no sense in doing that (any politician who ever suggests that it can be or should be is a liar).

Answer 3

The trillions of dollars of debt owed by the US consists entirely of a promise to pay by the US government. These promises are largely in the form of US government bonds which are routinely issued to pay for retired bonds plus some newly incurred debt of the US. The bonds just like our dollars are backed only by the full faith and confidence of the US government.

The world is awash with US dollars and US bonds. The question among many today is just how long the world will continue to hold these immense numbers of dollars and bonds??