What is the national debt?

The national debt, or government debt, is the total amount of money the government has borrowed from any source. Each level of government, from federal to municipal, 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. Domestic debt is funds borrowed from sources within the country. The money for this type of debt is raised by selling bonds, government bonds and bills. External debt is funds borrowed from foreign creditors. This may include private sources, other countries and the International Monetary Fund (IMF).

When a country is planning a large amount of spending or anticipates a revenue shortfall, it seeks to borrow resources to meet budgetary needs. Small towns and city governments often report their credit scores. They are authorized to obtain loans or mortgages to finance specific types of activity. The state offers a guarantee for the loan, which will honor the debt if the city fails to pay as expected.

The revenue or revenue for the government is in the form of tax collection and service provision. Governments cannot go bankrupt as they would have to stop providing services and another government would be forced to assume these obligations. Instead, governments must report their spending and borrowing activities to the federal government. They have the right to refuse to sign loans, write off debts, and remove government leadership from office.

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

Foreign investors have two options: buy government bonds or buy government debt. 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.

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

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