For political reasons, almost all governments (including the US) spend more money than they get from taxes etc. There are a number of things a government can do to cover the difference:
- Raise taxes (politically difficult and can have other negative consequences)
- Reduce spending on things like defence and education (politically difficult and can have other negative consequences)
- Print more money - which means more cash is chasing the same amount of goods which traditionally leads to inflation (though the relationship is actually more complicated than that)
- Sell "Bonds" - instruments that institutions, companies or people can buy which pay interest and which eventually, at some time in the future, the government will effectively buy back at a known price "Redeem the Bonds" (that is a bit of a simplification).
Most governments opt for selling bonds. The "National Debt" of a country can be thought of as being the sum of all the "Bonds" that are still paying interest, and that the Government hasn't Redeemed.
- The Government gets cash now in exchange for paying interest later. And if there is inflation then the "real value" of the amount it has to pay in interest or to redeem the Bonds is lower.
- The buyers get interest on their money, and a promise that the Government will Redeem their Bonds in the future. There is also an active market where a Bond owner can sell their bond to someone else - though the price is a market price and is not guaranteed.
It can all go horribly wrong. If the Government gets into a situation where it cannot pay the interest, or it cannot Redeem the Bonds it has promised to, then it may have to break its promise ("Default" on its payments). This makes the owners of the Bonds unhappy and means potential buyers of future Bond sales are less likely to want to buy the Governments new Bonds - effectively meaning the Government has to promise to pay more interest in the future. Recent examples of this include Argentina; and may include Greece soon.
The US is in the fortunate position that not many people believe it will Default. Therefore the new Bonds it sells (which it does on a regular basis) are still in demand, even though its interest payments, and promises to Redeem Bonds are huge.