How is debt sold by our government to other countries?
interdependent globalized world asked:
How does the debt system work, what happens when the other countries buy our debt, can they sell our debt to other countries, can they force us to pay our debts at any given time, please explain how the national debt system works?
How does the debt system work, what happens when the other countries buy our debt, can they sell our debt to other countries, can they force us to pay our debts at any given time, please explain how the national debt system works?
Thanks, I need lots of details and really want to understand so thanks again for your help!
February 26th, 2009 at 5:19 am
rather than using the term debt, use government bonds to understand the issue.
a debt has to be paid when its due. otherwise no one would do business with you. (it is not a very hard thing for countries)
February 27th, 2009 at 7:09 am
It is done when the government issues bonds. For example the US government issues Treasury Bills and Notes that anyone can purchase. When countries hold Foreign Exchange reserves they don’t actually hold cash. They hold bonds so that they can make interest. When a foreign country buys the bonds they bought our debt.
Yes they can sell our debt (bonds) to anyone at anytime.
No, they cannot force us to pay the debt at anytime, only when the bond matures (ie. a 30-year bond expires in 30 years)
February 28th, 2009 at 12:29 am
It’s sold in the open market through authorized dealers at auction. The debt is sold as bills, notes and bonds which have short, intermediate or long terms, respectively, at fixed rates. Once the debt is sold to buyers, the owners are then free to resell it to others. Based on the prices they get, there is an “effective” yield based on the face value interest rate and the discounted price it’s sold at. So, as the price of a Treasury rises, it’s effective yield falls, and vice-versa. The market is always fluctuating based on financial and economic indicators and the state of the political environment. Treasuries also effectively set interest rates instead of the Federal Reserve, not the reverse, because the immensity of the market will overwhelm the Fed’s power to raise or lower the discount rate. Average consumers like you or I can also buy Treasuries (or debt) through our broker or directly from the Treasury through Treasury Direct service, or through mutual funds and money markets which invest in them. Many argue that the current debt-based system is destructive of resources, human life and liberty and should be replaced again by a gold and silver standard (but that’s another subject).