What Is the US National Debt and How Does It Work?

The United States national debt represents the total accumulated financial obligations of the federal government. This figure reflects the cumulative impact of past governmental spending that has exceeded its revenues. The national debt is not merely a static number; it is a dynamic measure that grows and shrinks based on the government’s fiscal activities. This article aims to demystify the US national debt, explaining its fundamental definitions, how it accumulates, its various components, and the methods used to measure its scale.

Defining the US Debt

The US debt, often referred to as the national debt or federal debt, represents the total amount of money the federal government owes to its creditors. The U.S. Treasury Department defines it as the outstanding balance of expenses incurred over time that the federal government has borrowed to cover. This debt specifically pertains to the federal government’s financial obligations and does not include debts held by individual citizens, corporations, or state and local governments. For instance, a mortgage taken out by a homeowner or a bond issued by a city are not part of the national debt.

While “national debt,” “federal debt,” and “public debt” are often used interchangeably, there are subtle distinctions. “Public debt” refers to debt held by external entities like individuals, businesses, and foreign governments, which is actively traded in financial markets. The broader “national debt” or “federal debt” encompasses both debt held by the public and “intragovernmental holdings.” Intragovernmental holdings represent debt the government owes to its own accounts, primarily federal trust funds. As of August 2025, the total federal debt was reported to be around $37.14 trillion.

The national debt is distinct from a budget deficit. A budget deficit occurs in a single fiscal year when the government’s expenditures exceed its revenues. The national debt, conversely, is the cumulative sum of all past annual budget deficits, reduced by any surpluses.

How the Debt is Incurred

The US national debt accumulates primarily through consistent budget deficits. When the federal government’s expenditures for a given fiscal year surpass its revenues, it must borrow money to cover the shortfall. The US Department of the Treasury issues various debt instruments to bridge this gap. These instruments are promises to pay back borrowed money with interest to investors.

The most common types of these securities include Treasury bills (T-bills), Treasury notes (T-notes), and Treasury bonds (T-bonds). Treasury bills are short-term securities maturing in one year or less. Treasury notes have maturities ranging from two to ten years, while Treasury bonds are long-term instruments, typically maturing in 20 or 30 years. The Treasury also issues other securities, such as Floating Rate Notes (FRNs) and Treasury Inflation-Protected Securities (TIPS). These securities are sold at auction to a wide range of investors.

When purchased, investors lend money to the federal government, which uses these funds to finance its operations, programs, and services. The national debt grows as the government issues new securities to finance ongoing deficits and refinance maturing debt. The interest paid on these borrowed funds becomes another component of government spending. As the national debt increases, so does the amount of interest the government must pay to its creditors, impacting future budget decisions.

Components and Holders of the Debt

The US national debt is broadly categorized into two main components: “Debt Held by the Public” and “Intragovernmental Holdings.”

Debt Held by the Public

This represents the portion of the national debt owed to individuals, corporations, foreign governments, state and local governments, and the Federal Reserve System. This component is actively traded in financial markets and includes a diverse array of investors. For instance, individual investors might hold savings bonds, while large institutional investors like mutual funds and pension funds often purchase Treasury securities. Foreign governments also hold a significant amount of US Treasury securities as part of their foreign exchange reserves. The Federal Reserve System has also become a major holder of US government debt through its monetary policy operations.

Intragovernmental Holdings

This represents debt that the federal government owes to itself. This occurs when various federal government accounts, primarily federal trust funds like Social Security and Medicare, invest their surplus revenues in special Treasury securities. When these programs collect more in taxes or premiums than they immediately need for benefits, they are mandated by law to invest these surplus funds in non-marketable Treasury securities. These special securities are not traded in the open market. They represent an internal accounting mechanism, signifying future obligations of the Treasury to these trust funds and their beneficiaries. As of September 30, 2024, intragovernmental debt was approximately $7.1 trillion.

The distinction between these two components is important as they reflect different types of obligations and creditors. Debt Held by the Public is subject to market forces and interest rate fluctuations, while Intragovernmental Holdings represent an internal claim on future government resources.

Measuring and Understanding the Debt’s Scale

Measuring the US national debt typically begins with its absolute dollar amount. While this raw number indicates the scale of the government’s financial obligations, it can be misleading without additional context. A large absolute number does not inherently indicate economic distress or sustainability.

To provide a more meaningful understanding, economists use metrics that compare the debt to the nation’s overall economic capacity. One common metric is the “debt-to-GDP ratio.” Gross Domestic Product (GDP) represents the total value of all goods and services produced within a country’s borders over a specific period. The debt-to-GDP ratio expresses the national debt as a percentage of the country’s GDP. This ratio is considered a more accurate indicator of a country’s ability to manage and repay its debt, as it contextualizes the debt against the economy’s income-generating capacity. A higher ratio suggests a heavier debt burden relative to economic output. For instance, as of the second quarter of 2025, the US debt-to-GDP ratio was approximately 119.4%.

Another metric is “debt per capita.” This figure is calculated by dividing the total national debt by the country’s population, offering a per-person share of the debt. While simpler to understand, debt per capita does not account for the economy’s ability to generate revenue or the distribution of wealth, making the debt-to-GDP ratio a more comprehensive measure for assessing sustainability. The debt-to-GDP ratio often increases during periods of economic recession or significant national events, when government spending tends to rise and tax revenues may decline. Conversely, a robust economy with strong GDP growth can help to lower the ratio, even if the absolute dollar amount of the debt continues to increase.