What Is The Cause For The National Debt?
National debt is also known as government or public debt and is the money owed by
the government of the country, whether federal, central, municipal or even local
government. As the government represents the people, the national debt is in fact
the debt of the taxpayers. The national debt is paid off directly by a certain portion
of the taxes that people pay.
National debt is categorized further into internal and external debt. Internal debt
is the debt owed to lenders within the country itself while external debt refers
to national debt that is owed to foreign lenders. The debt is essentially all government
liabilities e.g. pension payments or other payments, which has not yet been paid
by the government. The debts may be short, medium and long term. Short term are
usually a year or less, medium are classed as around 5 years and long term are 10
years or more.
How Governments Borrow Money
Countries who have a respectable credit reputation can easily borrow money from
lenders within the country or from foreign countries. Governments often borrow what
they need by issuing securities such as government bills and bonds.
Credit reputation is based on the countries ability to pay back what they have borrowed
and also is based on the economic situation of the country and other income generating
revenues. Less credit worthy countries sometimes borrow directly from commercial
banks or from international financing but then are subject to stricter laws. They
are also limited to the amounts of money they can borrow.
Governments and countries usually borrow money in currencies where the demand is
the strongest. The most common currencies being borrowed are the Euro and US dollar
because of their popularity among investors. They are both well known worldwide
and are more stable than other currencies. Lenders rarely invest in other currencies
than these two as there is a concern of not being able to obtain the foreign currency
to pay for the interest or to redeem the bonds.