Those who lend money to the government participate in a fraud, for all of them know that it has only one way ultimately to pay either interest or principal: by stealing it. So if they ever lose it (and they will, as below) there will be no sympathy from this quarter.
They do the lending by purchasing municipal bonds and Treasury Bills, Notes and Bonds, and lenders come in two flavors: (a) real investors and foreign governments, and (b) the Federal Reserve Bank, or the Fed. As far as I've been able to find out, the current $13 trillion total US government debt (often but wrongly called the "national" debt) splits about half and half between the two, meaning that the Fed holds around $6.5 trillion in government paper. But for some reason they are very shy about publishing accounts, so we can't be sure.
All buyers of such instruments know quite well that it's a big pretense. The Feds are not going to return the promised money from their own resources, because they have no resources whatever and everybody knows it. If government (at any level) were an incorporated company with limited liability, its share capital (funds voluntarily placed with the enterprise in expectation of gain) would be zero--not even a nominal $100. That being so, nobody in his right mind would deal with it except on a strictly cash basis--and for sure, nobody would lend it a billion bucks for ten years. Why, then, does this happen? Because of its monopoly on force. Government does have that single "asset": the ability (though not the right, by any measure or definition) to extract money and other property by the threat of force from real people in its domain. So there's a paradox: at one and the same time, government is always bankrupt (there are no true financial assets in its ownership), yet it can never go bankrupt, for as long as it exists, it can always steal what it needs by taxation. Those who lend it money are therefore betting that it will continue to be able to steal enough to repay the loan with interest, and are electing to join the heist. They are staking their fortunes on the power of government guns and the thugs who wield them.
That is why all who hold some of their assets in "government securities" so readily support continuing taxation. If that tax machine ever broke down, they would lose the lot.
