Question

What are some advantages and disadvantages of the United States national debts? Distinguish between foreign and domestic debts.

Answer 1

In the short term, public debt is a good way for countries to get additional funds to invest in economic growth. Public debt represents a safe way for foreigners to invest in the growth of a country by buying government bonds. That is far safer than direct foreign investment. That's when foreigners buy at least 10 percent interest in companies, businesses, or real estate in the country. It's also less risky than investing in public companies in the country via its stock market. Public debt is attractive to investors at risk, because it is backed by the government itself.

Public debt improves a country's standard of living if used correctly. It enables the government to build new roads and bridges, to improve training and job training, and to provide pensions. This spurs citizens to spend more now instead of saving for retirement. This private citizen spending further stimulates economic growth.

Governments tend to take on too much debt because they are popular with voters because of the benefits. Increasing the debt enables leaders to increase spending without raising taxes. Investors generally measure risk levels by comparing debt to the total economic output of a country, known as gross domestic product (GDP). The debt-to-GDP ratio gives an indication of how the country is likely to pay off its debt

Usually investors start demanding a higher interest rate when the debt approaches a critical level. For the bigger risk they want more return. If the country continues to spend then its bonds may receive a lower S&P rating. This indicates how likely the country is to be defaulting on its debt.

As interest rates rise, refinancing one country's existing debt becomes more expensive. In time, revenue must go towards repaying the debt, and less towards government services. A scenario such as that could lead to a sovereign debt crisis, much like what happened in Europe.

Foreign debt is an outstanding loan or set of loans that one country owes within that country to another country or to institutions. Foreign debt also includes obligations to international organizations such as the World Bank, the Asian Bank for Development or the Inter-American Development Bank. Total foreign debt can be a mixture of short-term and long-term obligations. Also known as external debt, a country's governments, corporations or private households can carry those external obligations.

Internal debt or domestic debt is the part of a country's total government debt owed to lenders inside the country. Additional to the internal government debt is external government debt. The sources of funds for internal debts are commercial banks, other financial institutions, etc.

The internal public debt owed by a government (the money which a government borrows from its citizens) is part of the national debt of the country. It is a form of fiat money creation, in which the government gets financing not by creating it de novo, but by borrowing it. The money created is borrowed from central bank in the form of treasury securities or securities.