History

• In its most basic terms, the federal debt is the total dollar amount the federal government owes to all of its creditors. It is a cumulative amount that is added to or deducted from each year, like a running tab. A yearly deficit, or budget shortfall, repeated year after year, will increase the federal debt, but the federal debt does not start at zero every year. In 2010, the federal debt stands at over $12 trillion.
  
  

Types

• The federal debt is made up of two types of debt: debt held by the public and debt held by government accounts. Debt held by the public consists of outstanding bills and money that the government has borrowed from various sources. Most of the borrowed money is in the form of bonds, notes and other similar negotiable instruments. Any time a person buys a savings bond, it is a debt, since it is money the government has to repay. This is debt that is owed today.
  
  

Significance

• Debt held by government accounts is the amount of debt the government owes itself. This includes money for programs such as Social Security and Medicare. When the government receives money for these programs from the public, it can either hold it in reserve or it can use it to cover bills today and place an IOU in the account. It is not money owed directly to creditors; it is money the government has borrowed from itself. The debt is not of concern today, but it will be when the money needs to be paid out on the obligation it was collected for.
  
  

Misconceptions

• Debt held by government accounts is not an absolute figure, since it projects a future obligation. With Social Security, the debt figure is based on the number of people who are projected to reach retirement age at a certain time and how much they will be paid at that time. If a disease or illness wiped out a segment of the population in a certain age range or laws changed that reduced the payment amount or eligibility, then the liability would be reduced, and thus the shortfall amount. The result would be a reduction in our federal debt.
  
  

Considerations

• Of course, with inflation raising the value of the dollar, the dollar amount of a debt is relative. That is why most discussions about federal debt also include the percentage of GDP, or Gross Domestic Product. The GDP is the total market value of all the goods and services produced inside a nation. The amount of money owed and the amount of money produced relies on the same real currency value for both figures, so it can be a more accurate picture of just how much debt a country is carrying. In 2009 that percentage stood at about 83 percent; almost 40 percent lower than the highest figure of 121 percent in 1946. While the figure of $12 trillion may be record breaking, it is not in terms of how much debt the federal government has carried in the past.