How does national debt work?

Question

Relevant news story: [https://www.bbc.co.uk/news/world-us-canada-65781359](https://www.bbc.co.uk/news/world-us-canada-65781359)

So the US is borrowing money because it can’t pay for the money it already owes? As a consumer I’d think that is a really bad sign but apparently raising the borrowing limit has historically been “a formality”, so it’s not a bad thing?

Also “The legislation will result in $1.5tn in savings over a decade”, How does that work? Do you not pay interest on national debt or something? Also, where is the money coming from?

In: 3

Answer 1

You can’t really compare national debt, especially that of the United States, to like, household or individual debt. The thing is that the US is in control of it’s own currency, which is fiat money – it isn’t tied to the value of anything other than itself. Essentially the US decides how many dollars there are, and the dollars’ value is only decided based on how much people want to have them and how useful they are for buying things. And, the US doesn’t raise debt by like, applying for loans, they instead issue bonds and other securities, mostly to US citizens.

These facts taken together mean that US national debt is kind of just a number. So long as people continue to want and need dollars, and so long the government continues to payout on the value of the bonds it issues, it doesn’t really matter. The government gets to decide how many dollars there are so if it needs more dollars to pay for things, it can just invent more. No external authority can tell the US that enough is enough, we’re not going to lend you any more money, because again, we’re not talking about personal loans, we’re talking mostly about issuing bonds, and the government gets to decide how many bonds it issues.

The borrowing limit has been a formality because it was created to be a formality. The government has to pay for the things that it has put into the budget, and the possibility of not having enough money to cover those expenses can’t exist. When the budget is passed, the Congress already knows how much borrowing is implied in that budget – that’s just expenses minus taxation. But, the borrowing limit was imposed on this process under the thinking that it would limit government spending, and it has stuck around because despite being a formality, it’s a formality that members of Congress can use against the administration.