What is National Debt? - Definition, Effects & History

Instructor: Paul Mckinney

Paul has been in higher education for 17 years. He has a master's degree and is earning his PhD in Community College Leadership.

National debt is the total amount owed by a government to its creditors. National debt plays a crucial role in a country's financial system. Learn about this and test your knowledge with a quiz.

What is National Debt?

National debt is the total outstanding borrowing of a central government, comprising of internal debt (owing to national creditors) and external debt (owing to foreign creditors), incurred in financing its expenditure. National debt plays a crucial role in a country's financial system as government securities (being a secure vehicle for investment) form an important part of the reserves of its financial institutions.

National debt is generally divided into three categories:

Floating debt: Short-term borrowing such as treasury bills and borrowing from the central bank.

Funded Debt: Short-term debt converted into long-term debt.

Unfunded Debt: National savings certificates, savings bonds, premium bonds, and securities repayable in foreign exchange.

U.S. National Debt

The U.S. Treasury has borrowed trillions of dollars over the past decade, much of it from foreign investors, to help finance two long wars, rescue its financial system, and promote economic growth via fiscal stimulus. The country's ability to borrow is restricted by statute, and Congress has perennially been called upon to authorize the issuance of new debt space. However, the federal government reached its borrowing capacity of $16.39 trillion in December 2012. Below is a graph that shows the history of the U.S. national debt since 1949.

U.S. National Debt

Effects of National Debt

There are several negative consequences when a country has a large national debt. Below are just a few of the issues that can arise when a country loses control of its national debt:

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