When individuals and businesses need money, they turn to banks and other commercial lenders for loans. The U.S. government does not borrow money to cover its debt, but instead sells marketable Treasury securities, a process known as issuing debt. The U.S. Constitution gives Congress the authority to issue debt when federal government spending exceeds revenue from taxes and other sources. The Department of the Treasury manages the national debt by determining what types of securities will be issued when Congress reports that borrowing is necessary.
TL;DR (Too Long; Didn't Read)
When the federal government is running a deficit caused by spending that exceeds revenue, it doesn’t borrow money from a bank. Instead, it borrows from the public by selling Treasury marketable securities, a process known as issuing debt. The government repays its debt when securities are redeemed.
Debt Held by the Public
U.S. government debt held by individuals, corporations, Federal Reserve Banks and local, state and foreign governments is referred to as debt held by the public. This debt takes the form of Treasury bills, bonds, notes, Treasury inflation-protected securities (TIPS) and savings bonds. Most of these securities, with the exception of savings bonds, can be traded on secondary markets after their initial purchase from the Treasury. Savings bonds are registered to the original purchaser and cannot be traded. Investors in U.S. securities do not need to be U.S. citizens. In fact, foreign investors control a large portion of U.S. Treasury securities.
Debt Held in Government Accounts
A smaller portion of the U.S. government debt is represented by intragovernmental holdings, most of which are Government Account Series (GAS) securities held by government trust funds like Social Security, Medicare and the Federal Housing Administration. Debt occurs when the government borrows from these large entitlement programs with the understanding that the money will be paid back before it’s needed. The majority of these securities, like savings bonds, are non-marketable and cannot be traded.
Managing U.S. Debt
The Bureau of the Fiscal Service is the government agency responsible for managing the federal debt. It keeps records of securities sold and issues payments when securities are redeemed. The Bureau’s Summary Debt Accounting program provides daily, monthly and annual reports about the size and makeup of the national debt. Neither the U.S. Treasury nor the Bureau of the Fiscal Service controls the spending of borrowed money – that’s the job of Congress.
Reducing the Debt
The public debt is reduced when the amount of money paid out in redeemed Treasury securities is greater than the amount taken in by issuing new securities. This can usually only be done when Congress figures out how to decrease spending or decides to bring in more money by raising taxes. Throughout most of the nation’s history, there has been some level of national debt.