National Debt Versus Treasury Bonds

How is debt financing achieve by the US government?  The Continental Congress needed to borrow money in 1777 to continue fighting the Revolutionary war.  To acquire the needed supplies (food, tents, guns and ammunitions), the Continental Congress plunged the new nation into debt.

As with today’s deficits, the Continental Congress acknowledged its loans by issuing bonds.  This makes the US Treasury the fiscal agent of the US government.  When the Treasury borrows funds, it issues Treasury bonds.  People buy bonds (or lend money to the US Treasury) because bonds pay interest and are a safe investment for idle funds.

The total stock of all outstanding bonds represent the national debt.  It’s equal to the sum total of accumulated deficits less repayment in years when a budget surplus existed.  (Whenever there’s a budget deficit, the national debt increases).

The national debt represents not only a liability but an asset as well.  Those bonds are a liability for the Federal Government since it then has a later obligation to repay.  People who hold them (the same bonds) are an asset to them.  Bondholders have a claim to future repayment and can even convert that claim into cash by selling their asset in the bond market.  In conclusion, national debt creates as much wealth (for bondholders) as liabilities (for the US Treasury).

Neither money or any other form of wealth disappears when the government borrows money.  The fact that total bond assets equal total bond liabilities is of little significance to taxpayers.  The fear that either the US government or its taxpayers will be ” bankrupted ” by the national debt always lingers in their subconsciousness (shadows).  (Source: The Macro Economy Today, 8th Edition).