How Does National Debt Work?

What Is National Debt?

National debt is the total amount of money, with interest, that a country owes its creditors. The national debt is the culmination of all the expenses that were not returned in revenue. Most of this debt is owned by the public and owed to foreign investors, but some of it is owned by the government, which is typically referred to as intragovernmental debt. As of January 2025, USA national debt has spiked to over 36 trillion dollars, well above the previous cap of 31 trillion that was suspended by Congress in 2023. While this may seem extreme, all political parties seem to agree that raising or suspending the national debt ceiling is necessary.

How Is National Debt Acquired?

As previously mentioned, national debt is calculated based on intragovernmental loans and loans owned by persons in the country. People hold debt in the currency of the government of which they are citizens, and usually, debt is acquired for higher education, homes, medical costs, and pursuing business ventures. Currently, a large contributor to national debt is healthcare loans. The intragovernmental debt that accounts for approximately 20% of the national debt is typically increased by expenses from national defense, social security, and economic safety nets (such as the American system Medicare) when the taxes collected on a given year don't cover a significant amount of these expenses.

How Is It Dispelled?

Frankly, most countries do not focus on dispelling large amounts of national debt and instead focus on reduction methods, such as spending cuts and tax hikes. If there is a surplus, governments can use this to buy back treasury securities, which are a low-risk form of investment. Typically, treasury securities pay interest every six months and offer long-term and mid to short-term debt obligations. One of the most common forms of treasury securities you might have heard of are bonds, which are known for being practically the safest investment someone in America could make. Despite the mechanics of surpluses, usually national debt is instead managed through government restructuring necessary to continue functioning.

How Does It Affect People and the Country?

The most important part of learning about the function of national debt, as a resident or citizen of your country, is how it affects you. Many national debt creditors are foreign investors. While foreign investment can be incredibly beneficial to the economy, this can also raise national security concerns on occasion. Regarding the USA, there have been some minor concerns about the amount of foreign investment belonging to China. Regardless of security concerns, the national debt is incredibly significant concerning economic stability. National debt tends to correlate with economic instability, and substantial economic debt can also heavily impair the government's ability to manage economic crises.

Conclusion

While it's difficult to understand the full extent and implications of governmental actions and functions, as a citizen or resident of your country, it's important to educate yourself! If you're interested in learning more about topics like this, subscribe to our newsletter and follow our Instagram page (@nextstepbusinessofficial)!