What is really happening when a country decides to issue public debt?

Are you asking physically “How” a nation issues debt… or more philosophically what happens as a result? I’m confused.

By ‘issues public debt’ are you referring to a country borrowing money?

When the government borrows money (because it spends more than it takes in), it does this by issuing securities, various forms of government bonds. These are sold at a certain value, with a guarantee of being repaid later at a higher value—effectively, the government is paying interest on the money that the bond-holder is loaning to it. These bonds can be purchased by foreign countries as well as by private citizens.

The effect on the economy is, in theory at least, that all interest rates throughout the economy are nudged upward. If the government is trying to borrow lots of money, then the potential lenders are in a position to demand more interest. All the other entities out there seeking loans are then effectively competing with the government for credit, and so have to fork out higher interest as well.

@thorninmud explains it very well. A country issuing public debt is pretty much the country acting as a commercial lender.

Part of the critique of the current crisis is that the debt market ran with such a low interest rate because the fed wasn’t raising interest rates and competing because that could have potentially lowered the competitive advantage that the private debt market had, thereby deflating or popping the “real estate bubble” artificially. Of course, if they had tried to do it, they would have been accused of interfering in a boom market that people were denying was a bubble.

@tedd I’m asking physically “How” a nation issues debt… But also, what it might happen after it – Is it a good deal? What if the country can’t buy back them
@meiosis Yes
@thorninmud Great answer – But what if the country can’t buy back those securities. I mean, isn’t the State suposed to pay them back after the designated period of time for it’s value plus the interest???
@iamthemob So When you say “Of course, if they had tried to do it, they would have been accused of interfering in a boom market that people were denying was a bubble.” – Are you saying that they didn’t do it???

@Sayd_Whater thorninmud explained it pretty well but I’ll expand on it. The government of the US (and just about every country on the world) will issue treasury bonds to anyone who wants to buy them. These are essentially low interest, long term, “stocks” in the country (based on the value of their money). The interest rate on these bonds is usually VERY low, though still usually higher than a regular savings account at the bank. When you buy one of the bonds you are essentially paying say $100 for it, and then assuming that in 20 years when you get paid back $125 or whatever, the value of the US dollar will be improved to the point where you’ve turned a profit.

The US national debt was put in place by the founding fathers at the very start of our country. We know that A national debt is helpful for a country. Not just because of the effect it has on interest rates, but also it gives the country money to spend on public works projects and such up front, whilst giving the people who purchase them (which are most often private citizens OF the US) the interest on the back end, which they then spend into the economy. A “healthy” national debt is arguably around 75% of your countries GDP. The US’s is currently at just under 100% of GDP (though in fairness it has been this high and far higher many times before).

The country doesn’t “Buy back” the the securities. We simply give you the money that they’re worth. If the US dollar has tanked you lose money, if its appreciated, you’ve gained.

They didn’t interfere with the housing bubble, it crashed on its own prior to any excess finagling by the treasury department.

@Sayd_Whater Then it effectively defaults on its loan and its “credit rating” suffers. Potential lenders in the future will see it as a high-risk investment and will demand very high interest rates to loan that government any more money.

The government usually pays one lender back by selling another bond to another lender. Of course, they will have to keep selling even more bonds than they’re redeeming, because they have to pay the interest on the redeemed bonds. But the US federal government is currently approaching the legal limit of how much debt it can take on. If Congress doesn’t act to raise this limit, the so-called “debt ceiling”, many believe that there could be nasty consequences for our future debt load (see here).

@Sayd_Whater – They did not. The “bubble” burst on its own.