Federal Debt

By: EconomyWatch Content   Date: 17 November 2009

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Federal debt, commonly known as public debt or national debt, is the total outstanding liability owed by the US Federal Government. Investors or creditors of the federal government generally include:

  • US citizens

  • Corporations

  • Foreign governments

Components of Federal Debt

Federal debt can be broadly classified under two heads:

Public accounts: This is a portion of the federal debt which is owed to the public, as principal and interest on government securities like:

  • treasury bills

  • bonds

  • notes

These securities may be marketable or non-marketable, and are issued through government organized auctions. The bidding in these auctions can be competitive as well as non-competitive.

Government accounts: This portion of the federal debt is owed by the federal government to itself. Majority of this form of debt is owed towards Social Security and similar trust funds.

According to the US treasury, for fiscal years 1999 through 2008, approximately 60% of the federal debt was owed towards public accounts.

Federal Debt Ceiling

A statutory ceiling on federal debt was established in 1917 under the ‘Second Liberty Bond Act.’ The federal debt limit is revised periodically by the US Congress. As of February 2009, this limit was increased to $12.104 trillion under the ‘American Recovery and Reinvestment Act.’

The federal debt limit creates greater leeway for the US Treasury to administer debt levels in the nation. It also imposes a substantial degree of fiscal accountability on the Congress, compelling it to take actions for raising federal borrowing in case of national deficit or when government expenditure increases its revenue. The US Treasury has also been given independent authority by the Congress for issuing such debts for funding government operations. However, the total debt after the new issue should not surpass a stated ceiling. This restriction may be removed in some special cases.

Federal Debt and the Economy

Initially, federal debt or deficit spending can help in increase economic growth, especially in a recession. The higher wealth that federal debt creates through treasury notes, bonds and other securities encourages people to save less and invest more; thus raising the economic activity.  

However, the resultant accumulation of federal debt, in the long-run, can be very detrimental to the economy, causing aggregate demand to increase faster than production. Such a scenario leads to inflation, compelling the Federal Reserve to raise interest rates to combat inflation.


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