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IPFS News Link • Government Debt & Financing

Interest on the National Debt--Who Does It Go To?

•, Peter Jacobsen

This week, to start off "Ask an Economist" for the year, I have a question from Stan K. about the national debt. I'm happy to report that after asking for questions in early January, I have received the most ever. I look forward to working through all I can. Here is Stan's question:

Peter, I often bemoan the mess we have as our national debt climbs and interest on the debt becomes one of our biggest mandatory expenses. However, I was pontificating on this budget-busting danger to my wife, and she asked, "Who do we pay interest to, and how do we pay it?" My answer was pathetic. Can you help me out?

So we have a question about the ever-growing US debt. Let's look at who owns it and how it's paid.

How the Government Borrows Money

When the government borrows money, it does so in a different way from when you and your family borrow money. Most of the time when individuals borrow money, they take out a loan which accrues interest and is paid back monthly (or at some regular interval).

Not so with the government. Instead, the government takes on debt by issuing a bond. You've likely heard of government bonds before. Maybe you received one from a grandparent when you were a kid—meant to show you the value of waiting. Many people include bonds as part of their financial portfolios, especially as they get closer to retirement.

The government offers a few types of bonds that operate with some differences, but here's how they generally work. You buy a bond which has a face value of, say, $1,000. After the bond matures (some bonds take as long as 30 years to mature) you receive the $1,000.