National Debt vs. National Deficit

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Sorry to insult the intelligence of a few very smart folks out there, but considering the vast amount of financial news we’re digesting every day, I thought a refresher on the national debt and the national deficit was in order. If you’ve been confused by these terms, you’re in good company. I read a newspaper article last week that used the meanings of these two very different things interchangeably. So what are they?

What is the National Debt?

The national debt is the total amount of money owed by the US Federal Government to creditors who hold US Debt instruments (like Treasury Bills and Savings Bonds). It includes all federal debt held by states, corporations, individuals and *this is the kicker* foreign governments. Yes, you heard right. We borrow money from other countries’ governments to finance our own. Which really means that we’re borrowing from their citizens to pay for programs for our citizens. It’s a head scratcher I know. By the way, that doesn’t even include the amounts we’ve promised to pay out for Medicaid, Social Security, and Medicare.

The National Debt is also known as the public debt or the government debt.

Now that we’re clear on debt, let’s move on to that other D word.

What is the National Deficit?

The National Deficit is a budget deficit of the federal government. If the government drew up a spreadsheet and subtracted all the expenses from all the income, they’d come up short. The amount of this shortfall is the national deficit. They spends more money than they earn. So, just like you do when you really, really, really want those Jimmy Choos, or the cool new bike, or the newest iPhone, the federal government takes out a loan. Where you use plastic, the government uses Treasury Bills and Savings Bonds. And this brings us back to debt. As deficits accumulate, they must be financed. That’s where the confusion with the terminology sets in.

I hope this shines a little sunshine your daily stroll through the financial press!

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Comments

  1. dobbsfox's Gravatar Comment by dobbsfox on November 3rd, 2008 at 11:13 am

    Thanks for this informative (if somewhat patronizing) post.

  2. Lela's Gravatar Comment by Lela on November 3rd, 2008 at 3:59 pm

    Didn’t mean to be patronizing. It just all gets jumbled together sometimes.

  3. Shamsher Singh Mann's Gravatar Comment by Shamsher Singh Mann on March 24th, 2009 at 12:14 am

    Nice one. Short and sweet.

  4. Sissy Willis's Gravatar Comment by Sissy Willis on April 13th, 2009 at 1:29 pm

    Thank you very much! Very clear and elucidating for us financial illiterates out here. :-) I found you in a google search, by the way.

  5. joe stafura's Gravatar Comment by joe stafura on June 29th, 2009 at 2:10 pm

    The analogy that most online “experts” like to use, comparing a household budget to the governments budget, is incorrect.

    It is easy to see why they do it, it is simple and appeals to populist outrage, it is yet another embarrassing legacy of the conservative movement.

    Comparing buying a pair of Jimmy Choo’s or and iPhone to the operating budget of a country or even a company for that matter shows how little personal wealth advisors know about economics.

    So the next time you are tempted to pay someone for “manage your money” stop for a minute and read some of the nonsense that gets spouted by these guys, don’t pay them 2% or $100 an hour to spend your money unless they guarantee results. They won’t do that so you can do just as well with an index fund or some bonds.

  6. Chrisxx's Gravatar Comment by Chrisxx on August 24th, 2009 at 8:58 pm

    Damn….You people are touchy.

  7. Carl Exantus's Gravatar Comment by Carl Exantus on November 29th, 2009 at 4:15 am

    Oops I’m toucnh!Comparing buying a pair of Jimmy Choo’s or iPhone to the operating budget of a country is immensely ludicrous and absurd. Those conservative minds who leave us with an precedent spitfall should be ashamed of themselves…

    Although the basic principle of economic is buying and selling, however, the massive debt and deficit of a government have nothing to do with buying a pair of Jimmy Choo’s. As the French would say “Loin de la mes dames et monsieurs.”

  8. AJ's Gravatar Comment by AJ on December 7th, 2009 at 2:40 am

    You say: “The National Debt is also known as the public debt or the government debt.”

    National Debt and Public debt are not the same. National debt = Public Debt + Intergovernmental debt

    Some governmental agencies actually have some cash, and the government borrows from them.

  9. sean's Gravatar Comment by sean on March 26th, 2010 at 2:52 am

    Thanks for this awesome post! I don’t even mind that it was a bit patronizing. You’ve earned the right to be a bit patronizing in my book because you did your homework which many didn’t do… Seems simple enough when you put it this way. People rarely learn new things unless they are looking for the information on their own… You couldn’t have made it any easier to understand. Thanks again!

  10. CD's Gravatar Comment by CD on September 23rd, 2010 at 11:19 am

    @joe stafura
    How is it an incorrect analogy? Both have income and outlay. If the outlay exceeds the income there is a deficit. In order to cover that deficit a loan must be taken creating a debt. It works exactly the same in both cases. The real difference is the scale. A household budget is infinitesimal compared to a government’s budget.

    @AJ
    You are correct. The federal government does borrow from some of its agencies. A prime example of this is when money is taken from the Social Security fund, which was designed to be self-sufficient, to pay for other programs. This is an extremely bad practice, but is difficult to stop once it is started. Largely because of the increased cost of further deficit spending which does not allow the internal loan to be repaid.

    @Lela
    Great article, thanks for posting.

  11. Joe stafura's Gravatar Comment by Joe stafura on September 23rd, 2010 at 5:20 pm

    @CD There are many more differences than similarities between household debt and government debt, since your financial training is minimal (an assumption from your answer) there is no way to close the gap in this post but it is easy to compare a business debt load to the government as you at least have common instruments like balance sheets and GAAP.

    Personal debt loads are often higher than the government, especially when people were refinancing like drunken sailors and moving into houses that took half of ther cash flow. It is also rare that a person increases their productivity at a steady rate. I have debt because it makes sense,it is ten percent of my net worth.

    Government debt compared to net worth is lower than most citizens, and we have continual productivity increases that increases the value of our asset side at a steady clip. That is also why we can print money, even though some conservatives seem to think god set up a zero sum game ALL wealth is created and we create it. This single point seems to be impossible for people like you to understand so this fall you are going to reelect people who don’t understand it either. Thx

    The government debt as a percentage

  12. Sally's Gravatar Comment by Sally on October 7th, 2010 at 8:30 am

    This is an an article to inform the population of the growing problem. Don’t take every little word so literal. A comparison between every day spending and “government spending” may make a bit more sense to the less intellectually inclined. Go do something better with your time if you are going to nit pick here.

  13. Byron's Gravatar Comment by Byron on January 4th, 2011 at 5:20 pm

    It is folks like Joe Stafura who have gotten us into this mess we’re in. Their Ivy League economics forget a few things: The government has NO money, they get it from the people. The government does not have ANY productivity, it is provided by the people. The people cannot increase their income if they get in over their head like the government can raise our taxes. The people have had limits on the amount we can borrow until recently enforced by lending organizations. Human frailties have allowed some people to purchase homes that they can’t afford. Some states have signed benefits contracts with their workers that they can’t honor, thinking that they can just go in debt and float bond issues to pay off their retirements. The one thing that is common to a household vs the govt: When a household gets overextended, the taxpayer pays; When the government gets overextended, the taxpayer pays. How far can the govt go? That is the question.

  14. Joe Stafura's Gravatar Comment by Joe Stafura on January 5th, 2011 at 3:45 pm

    Byron,

    You say that the government has no money, it is the people that have the money, but that argument is circuitous.

    The Government IS the people, the Constitution starts with “We the People”, but a government structure is one group of people, families are another, and the economic rules around them are different.

    I hate wasteful Government spending, but the money wasted on two wars overwhelms the amount of money wasted helping people that are losing their homes

    I’ve raised my income many times in my life, it is called working hard and doing a better job than asked. My asset to debt ratio is over 10:1 as a result of increasing income.

    And I paid more taxes as a result and unlike John Boehner and other small minded bigots I view paying taxes as an honor for the right to live in this great country.

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