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Public debt is divided into internal debt , owed to lenders within the country, and external debt, owed to foreign lenders. It consists of government bonds, bank loans, and according to some measures, unfunded liabilities such as pension plan payments and goods and services the government has contracted for but not yet paid.
Lendings to governments are often termed "risk free" and made at a so-called " risk free rate". This is because the debt and interest are highly likely to be repaid. If not, presumably, the assets of the government could theoretically be seized — but more likely, the government has the power to raise taxes or charge fees to access those assets, which people living nearby have no choice but to use. For instance a water system or sewage system or power grid or roads. So public debt differs from private debt in that it is ultimately backed by the power to force people to pay, or lose access to critical infrastructure.
Today, public debt is often denominated in U.S. dollarsThe United States dollar is the official currency of the United States. It is also widely used as a reserve currency outside of the United States. Currently, the issuance of currency is controlled by the Federal Reserve Banking system. The most commonly u. The U.S. Federal Reserve sells its long bond , a 30-year instrument (though in recent years only a 10 year bond has been sold), directly to central bankAlthough officially state owned in most countries, the central bank is usually an autonomous entity responsible for the stability of the national currency see also money and the national financial system as a whole. Furthermore it designs and implements ms of other countries, who then often find it convenient to lend in U.S. dollars to others, or buy their bonds using those U.S. dollars.
This standard of deferred paymentA standard of deferred payment is the accepted way (in a given market) to settle a debt. For example, while the gold standard reigned, gold or any currency convertible to gold at a fixed rate constituted such a standard. As of 2003, the US dollar or Euro effectively insulates the U.S. from foreign exchange risk . Seeking similar advantages, the EU issues the EuroThe euro ISO 4217 code EUR is the currency of twelve of the twenty-five nations that form the European Union (and four outside it, as well as Montenegro and Kosovo), which form the Economic and Monetary Union (EMU). It is the result of the most significan's bonds and competes as what is called a reserve currencyA reserve currency is a currency which is held in significant quantities by other governments and institutions as part of their foreign exchange reserves. The United States Dollar is the most important reserve currency in the world today, followed by the — that currency which is most acceptable to pay off public debts, taxes, or purchase what can be sold quickly.
Countries that borrow in denominations of their own currency will gain very similar advantages, however, since purchasing power of the money repaid (as measured in U.S. dollars or Euros) may vary considerably from that which was expected at the commencement of the loan, a higher interest rateAn interest rate is the 'rental' price of money. When a resource or asset is borrowed, the borrower pays the lender for the use of it. The interest rate is the price paid for the use of money for a period of time. One type of interest rate is the yield on is always charged for such instruments. Some countries, like China, do not allow their currency (the renminbi) to trade outside the country or on currency market s. These must always use one of the global reserve currencies.
During the gold standard period, which began in the 19th century and ended as an international system in 1933, public debt was most often repaid strictly in gold bullion.
The Bank for International Settlements is an entity that sets rules to define what loans qualify as "risk free" or not. It is a very powerful institution, which has had a pivotal position in central banking since its opening in 1947. It was formed by the Bretton Woods agreements of 1944, which in the context of World War II, specified the U.S. dollar as the universal global reserve currency, and pegged the dollar to a fixed amount in gold. While this ability to redeem dollars in gold legally ceased in 1970, it was effectively a fiction for decades.
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