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What is National Debt?

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  • Written By: Carol Francois
  • Edited By: Bronwyn Harris
  • Last Modified Date: 14 March 2014
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National debt, or government debt, is the total amount of money that the government has borrowed from any source. Every level of government, from the federal to the municipal levels can have its own debt. All these debts are included in the total national debt.

There are two types of national debt: internal and external. Internal debt is funds borrowed from sources within the country. The money for this type of debt is raised by selling securities, government bonds, and bills. External debt is funds borrowed from foreign lenders. This can include private sources, other countries, and the International Monetary Fund (IMF).

When a country is planning a large amount of spending or is anticipating a shortfall in revenue, it looks to borrow funds to meet the budgetary needs. Small cities and municipal governments often report on their credit rating. They are allowed to take out loans or mortgages to fund specific types of activity. The security for the loan is provided by the state, which will honor the debt, should the city be unable to pay as expected.

Revenue or income for the government is in the form of tax collection and provision of services. Governments cannot go bankrupt, as they would have to stop providing services and another government would be required to take over those obligations. Instead, governments must report their spending and borrowing activities to the federal government. They have the right to refuse to sign loans, cancel debts, and remove the government leadership from office.

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Anyone who owns government bonds or securities is lending money to the government. Those financial instruments are issued as an investment, with a fixed interest payment. The interest rate on government bonds is typically lower than the private sector, but they are guaranteed.

Foreign investors have two options: purchase government bonds or buy government debt. The purchases of government bonds by foreign investors have specific rules and guidelines. This type of activity is a combination of wealthy individuals, investment groups, and foreign governments.

Purchasing government debt is usually restricted to other governments. In this type of financing, the foreign investor reviews the details of the debt and the terms. They have the resources to purchase large amounts of debt and to provide an income stream to the issuing country. As with all debt, the risk of relying too heavily on debt is that you are committing a significant portion of future income to paying down this national debt. The only methods available to a government to raise money are to increase tax or sell assets.

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Discuss this Article

GoldfromLead
Post 6

The issue is not the amount of debt, but how said debt is structured and how much income that debt (re-presented by infrastructure etc) is generating. Stop dancing to the conditioning used to steal from you, and start thinking. A total national debt (all debt incurred long and short term) of one years GDP is a drop in the bucket. If the GDP/debt ratio inverted for a long period of time, then one would have to worry.

Remember, no one lends money (buys "good" debt) without the prospect of a good profit.

Using national GDP/national debt comparisons to scare populations into aiding those subversive of civil government is the real gambit behind the recent round of manufactured banking fiasco's worldwide.

David09
Post 4

I have to say, all of this sounds really scary, but how likely is it to really affect people on a daily basis? I mean, many of the larger countries in the world have a substantial national debt and the sun is still rising every day.

I guess what I'm saying is that though I'm sure there is cause for concern, I think it's also easy for things to get out of perspective. Just some food for thought.

Mammmood
Post 3

@Charred - When did this problem start? I thought back in the late ‘90s we had a national debt surplus?

MrMoody
Post 2

@Charred - I read somewhere that the Chinese have lightened their holdings of the current national debt because they worry we won’t be able to pay our obligations. Right now they own about half of all the U.S. debt. What will happen if they quit lending? Will the government raise taxes or print money like crazy? I think we’ll continue to keep our AAA credit rating for quite some time, but the International Monetary Fund and other nations will look for a new reserve currency that will replace the dollar. Or maybe we’ll go to a cashless society or something like that. The way things are looking now, anything is possible.

Charred
Post 1

I checked the national debt clock and the U.S. national debt stands at over 14 trillion dollars and growing. That’s a mind-blowing number and we each owe nearly $50,000. I have two kids, one who’s about to enter college and the other one will go to college in a few years. It’s disheartening to think that they are going to graduate and enter the work force with so much debt hung around their necks. Our politicians need to put bickering aside and get this problem under control.

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