Federal debt is the money that the federal government owes to creditors, such as other governments and businesses. The government uses borrowed funds to supplement deficit budgets and finance expenditures. Federal debt has three main categories: floating debt, funded debt and unfunded debt.
The federal government borrows by issuing treasury bills, treasury notes and treasury bonds. The Public is accepting to government borrowing if funds are used to stimulate economic development. The growth of national debt reduces the tax revenue available to finance federal services, leading to low living standards. This is because tax revenue pays interest on the federal debt.
An increase in treasury securities causes corporations to increase the price of services and commodities. It also reduces the net worth of homeowners. Proper utilization of debt fosters long-term economic growth.
Federal debt has increased consistently in the United States since the late 1990s. If borrowed funds are used to finance public consumption, it only benefits the present generation. Default in payment of federal debt causes the government to lose economic, social and political power.
Government spending increases federal debt while tax reduces it. Government borrowing increases during war or recession. High federal debt limits borrowing facilities for economic enhancement projects. It also makes foreigners view American corporations as risky.