tj, you are studying this stuff yes? think of soveriegn debt as a commodity. Debt is sold as bonds (bills, coupons depending on maturity - but the same thing). When more capital is required to grow the economy, they create/issue/release it via selling quantum amounts of term securities at market rates. It is more of a problem being able to sell it or not, and who holds it. For any financial entity, if you own the debt, you control that entity (over and above any shareholders by the way).
It's called soveriegn debt, but this is a bit of a misnomer. Sure it's a liability issued by a nation, but it is capital raised, and becomes a fixed income asset when it is sold against an enduring liability that is created. It raises the money needed to prop up whatever is failing - how it is used is paramount.
An enduring liability because it relies entirely on the eventual recovery of the economy to fund the terms of this debt to maturity. At any given moment, it is a collection of all outstanding liabilities from events 30 years ago are coming to maturity this year, as well as promises of repayment for the next 30 years.
Growth in long term debt is a soverign killer. You can always roll over short term debt, but you can't roll over long term debt. When long term debt becomes worthless, it's lights out via hyperinflation to oblivion, or severe contraction to save the currency. You have created too much of a commodity that nobody wants.
All bonds are sold in the fixed income market. The singular primary source of 'new' capital. The abuse of this market lasts for generations and destroys currencies. Hence you will see the effects reflected in the currency value also.
Fixed because you either demand higher yields on lower prices or higher prices on lower yields. Yields are earnings, prices are a capital gain. Hence why bonds should always return at least a postive (to zero) nominal amount to the holder, assuming he holds (why else do you buy it, and why else it is issued).
Ones trades off against the other. If the price/yield relationship ever gets divorced, this is a bond market meltdown and very bad [moderated] would be happening to cause it. This would be a catastrohpic failure of finance as fixed income is the last remaining bastion of the lowest risk anyone is supposed to be able to rely on.
What we have seen is a collapse of the high yield/junk end of the market - the mavericks selling dog faeces to the desperate. If this falls far enough depending on the many who became desperate and effects the fixed income market as whole, then there is nothing left to do.
For the next 5 years we are going to watch damage control throughout the US from all the pension funds and wealth funds where the clients (the consumer) is going to come calling for withdrawals because they are retiring and prices haven't deflated enough for them to get by on what they've got. This is wealth destruction.
In short, the money the US have so far spent (raised) has funded 10 years of incompetent management and deliberate abuse that will no doubt continue. It's done nothing to help US mums and dads regain security and independence - I call it aiding and abetting the continuation of financial incompetence.
Australia so far has a much higher level of discipline amongst its consumers and investors. The more we ever wish to be like the US, the faster we will surely get it. Something I hope never happens.
