Question: We have a $12 trillion dollar debt and add to it pretty much every year. How does that work? I take on debt to buy, say, a car and I pay interest to the bank that loaned me the money. On a $10,000 car, I actually pay say $15,000 over the life of the loan. So, the bank makes $5,000. Who do we (America) pay interest to on our debt? Does the debt that China or some other foreign country owns work just like my car?
And if China only has a fraction of our debt, how does it work when the U.S. actually owns the debt? And who takes on that debt?
Paul Solman: Nice questions, Dusty, which you’ve managed to answer yourself. And quite clearly too. We pay interest to our creditors just like you do to a bank, and just like your bank pays interest to you. It gets credited to your account. Same thing happens to someone who holds U.S. Treasuries.
My wife and I bought Series I U.S. savings bonds years ago. They’re on account with the U.S. Treasury as electronic entries. Each thousand dollar bond is now worth considerably more, due to the interest that’s accrued. If I want the money, the government will send it to me.
As to the U.S. owning its own debt — via the Social Security Trust Fund, for example — well, it’s no different than any other government obligation. When I start taking Social Security, the government will start sending me checks. To cover those checks, it will use money it has either raised in taxes, or from borrowing. The idea of a “Trust Fund” was to put money aside for the baby boom. But since we’ve been running deficits for years, and borrowing more to make up those deficits, we haven’t really put away anything. The Trust Fund is just a symbolic commitment. See our piece from 2001 on this, which remains the best we can do to visualize what’s going on.