To finance the debt, the U.S. Treasury sells bonds and other types of securities (Securities is a term for a variety of financial assets). Anyone can buy a bond or other Treasury security directly from the Treasury through its website, treasurydirect.gov, or from banks or brokers. When a person buys a Treasury bond, he or she effectively loans money (from their past savings) to the federal government in exchange for repayment with interest at a later date.
Most Treasury bonds give the investor – the person who buys the bond – a pre-determined fixed interest rate. Generally, if you buy a bond, the price you pay is less than what the bond is worth. That means you hold onto the bond until it “matures.” A bond is mature on the date at which it is worth its face value. For example, you may buy a five-year $100 bond today and pay only $90. Then you hold it for five years, at which time it is worth $100. You also can sell the bond before it matures.
There are actually many different kinds of Treasury bonds, but the common thread between them is that they represent a loan (from past savings) to the Treasury, and therefore to the U.S. government.
The federal debt is the sum of the debt held by the public – that’s the money borrowed from regular people like you and from foreign countries – plus the debt held by federal accounts.
Debt held by federal accounts is the amount of money that the Treasury has borrowed from itself, such as from trust funds, which are federal tax revenues that can only be used for certain programs. When trust fund accounts run a surplus, the Treasury takes some of that surplus and uses it to pay for other kinds of federal spending. But that means the Treasury must pay that borrowed money back to the trust fund at a later date. That borrowed money is called “debt held by federal accounts;” that’s the money the Treasury effectively lends between different federal government accounts. Almost one-third of the federal debt is held by federal accounts, while the remaining two-thirds of the federal debt is held by the public.
Debt held by the public is the total amount the government owes to all of its creditors in the general public, not including its own federal government accounts. It includes debt held by American citizens, banks and financial institutions as well as people in foreign countries, foreign institutions and foreign governments.
As you can see in the pie chart above, about one third of the total federal debt, and nearly half of debt held by the public, is held internationally by foreign investors and central banks of other countries who buy our Treasury bonds as investments. These countries include China ($1.3 trillion), Japan ($1.2 trillion) and Brazil ($262 billion), the three countries that currently hold the most U.S. debt. Treasury also groups foreign holders of national debt by oil exporting nations (including Iran, Iraq, Kuwait, Ecuador, Nigeria and others, $297 billion) and Caribbean banking centers (Bermuda, Cayman Islands, and others, $293 billion).
The next largest portion of debt held by the public is held by private domestic investors, which includes regular Americans as well as institutions like private banks.
The U.S. Federal Reserve Bank and state and local governments also hold substantial shares of federal debt held by the public. The Federal Reserve’s share of the federal debt is not counted as debt held by federal accounts, because the Federal Reserve is considered independent of the federal government. The Federal Reserve buys and sells Treasury bonds as part of its work to control the money supply and set interest rates in the U.S. economy.
The debt ceiling is the legal limit set by Congress on the total amount that the U.S. Treasury can borrow. If the level of federal debt hits the debt ceiling, the government cannot legally borrow additional funds until Congress raises the debt ceiling, and could be left with no way to pay its bills. If this happens, it could result in sudden interruptions of government services and unintended consequences.
Congress has the legal authority to raise the debt ceiling as needed. Doing so does not authorize new spending, but rather allows the Treasury to pay the bills for spending that has already been authorized by Congress.
Source: National Priorities Project https://www.nationalpriorities.org/budget-basics/federal-budget-101/borrowing-and-federal-debt/