There are a whole bunch of sources. The major ones are:
* Themselves. One of the major holders of US government debt is the US Social Security system, for instance.
* Other countries. You can simultaneously owe money to someone and be owed money by them, and there are a few countries (eg, some of the major oil producers) that are net lenders.
* Non-governmental entities. Retirement funds, personal investment accounts, corporations, etc, all purchase government debt because it's one of the lowest risk investment options available.
Lots of people want to loan money to governments, since they are likely to get their money back. So that all counts as government debt. If you invest in a government bond fund, you are loaning money to the government, and contributing to the debt.
Governments have a lot of assets that they don't keep on their balance sheet, too. The US could pay down the debt by selling off government land, they way they already auction off mineral rights, spectrum licenses, etc.
for instance in the US they'll have debt auctions where usually financial institutions will place bids on debt. Some of these institutions will be retail banks and they offer them as investments to everyday people.
To understand bidding on debt here's a simple example: The US govt says they will pay $1000 to someone in 5 years. What's it worth to you? For the US govt there is basically a 0% chance they won't be able to pay that $1000 so maybe they can sell that promise for $950 today.
They'll do with with billions of dollars on a regular basis.
You can borrow from your own people. The money that is printed is **FEDERAL RESERVE** (thanks for the corrections) notes--it's *technically* a debt that the Reserve owes the bearer of the note (but printing money does not technically increase the debt supply--the role of money has changed since fiat currency).
When you print more money, you are devaluing the rest of the currency that is already in circulation. This means that if the govt decided to print $100,000,000,000,000,000 (1 quadrillion dollars) in the span of a week, the value of the dollar would probably crash pretty hard (probably...). This is related because people use money to buy US debt--we're loaning the US govt the very money it prints. The only reason that this results in anything favorable is because people all over the world value USD and that paper currency represents potential labor, new assets, etc.
If you own a baseball card of Sammy Sosa, there is a chance it could be worth a lot of money. Now imagine if the card company just mails a Sammy Sosa card to every family in America. Your Sammy Sosa card isn't worth anything anymore because there are so many of them and everyone has it now. Now imagine if they mailed another 5 to everyone--the value crashes even harder because there are SO many of them now.
That's the same idea with money. You can't keep printing more money or else the value of it will deteriorate. But the gov't keeps issuing more debt and we still look at $20 like it's $20, right? Eventually, there could come a time when we look at a $20 bill and it means nothing to us.
This is what happened in Zimbabwe where a billion dollar transaction might happen for a loaf of bread. They printed so much money (without proper secure backing by the gov't) that it just became worthless. So they started to just increase the numbers on their currency so you can actually pay for something.
Because the gov't theoretically owes its population money, they issue paper as a certificate of this. You might not have physically went to the bank and traded something in return for paper but you did something that warranted the earning of that dollar. If you work for a company, they pay you that money because it has value and you can buy things with it.
The only reason it has value is because the US gov't says it does. You can pay gov't-related fees and bills with the money they issue and because the gov't is well-secured, people accept it. If our gov't was unstable, no one would trust the dollars they slept under for warmth because the gov't could just come out and say, 'Sorry we're not paying you guys back'.
Well what would they be paying back? To whom are they paying back to?
It used to be gold. But as we grew as a planet, we ran out of gold to back every dollar with and it just became a nightmare to handle. Enter, fiat currency, a piece of paper that means nothing except what the gov't says it means.
People used to go to banks with gold and receive 'money' for it. The banks would literally hold their gold and give them an certificate that says they own a claim of gold in their vaults. If ANYONE brought that certificate to the bank, they could expect to receive gold for it. That's what gave it value.
You could say you want that farmer's potatoes and he can go get $1 of gold from the bankers at his convenience or he could hold onto it and use it just like the person did before him--'trade' it for something else like new shoes. Why? Because everyone liked gold and everyone believed gold had value.
Eventually, this took off and people stopped trading for things and we developed currency with quantitative values that allowed for easy exchanges to take place.
So you might think, 'Well, now that there isn't gold behind my dollar, how is it worth anything even if the gov't say it is? They won't give me anything in return for it".
The same thing applies to gold. No one wants gold unless other people want gold. If you can't reasonably trade your gold for something else, then what value does it have? (Someone did point out you can shave gold flakes into your water and drink it, like some companies have chosen to do, but that's on you)
As long as people continue to value dollars, it doesn't matter what it's worth, sans some certain supply and demand laws. So gold is no different in that regard. The ONE difference between paper currency and gold is that $100,000 in cash weighs a lot less than $100,000 in gold and is a lot easier to hide too.
EDIT: I made some slight revisions to correct errors and to try and relate things better to the main topic at hand. Sorry, I kinda started rambling. I have also posted below in response to u/penny_eater to correct my errors and explain them in a little bit further detail but it kinda strays away from ELI5 territory.
This kinda seems all over the place but it should be good starter information for someone trying to understand debt markets and macroeconomics, in general. Monetary supply and debt are pretty hand-in-hand, even if they're not exactly the same thing.
Larger and more complex economies warranted the development of fiat currency which ultimately changed the role of currency, in general. It no longer represents a claim, per se, but it represents value because the gov't says it has value and will accept it for gov't related transactions and business with foreign entities.
Also, don't get me started on the petrodollar.
**Sorry I wanted to just double clarify. My main answer to the question "Who does the US Gov't borrow from?" was "It's own people". My money talk (everything after that first sentence) was just to lead into the topic of increasing debt, economics, and the value of this debt in the coming future. **
I thought "It's own people" would be a sufficient answer to that but started to get into the reasons why that is starting to look like a bad idea especially in our current economic environment.
Some rich countries such as Saudi Arabia and the UAE have "sovereign wealth funds" that invest heavily in other countries e.g. buying US Treasury Bonds is basically buying US debt. Rich individuals are also in the Bond market via investment banks.
One another, their own people. What most people fail to realize is that the global economy is what is called a "faith based" economy. Basically the money doesn't actually exist and is worth exactly as much as people think it is. This is why after 9/11 it was so essential for the US government to get people going out and spending again and to get wall street betting again.
Without constant faith in the economy it inevitably will crumble. This system works fairly well but all you need to destroy a country is for its people to lose that faith which is one reason why Greece is in such a massive shit storm right now.
For the United States, the biggest owners of the debt are private American citizens.
Other big sources are loans from one government department to another, money outstanding for work performed by government contractors (e.g. if the US state pays ABC Corporation $27 million for constructing a road, that $27 million becomes debt from the time contracts are signed until the final payment is made), and the sovereign wealth funds of other countries.