The Causes Of Internal Debt
In public accounting, internal debt or local debt is that portion of a country’s total debt owed to private lenders within that country. For example, local credit debt typically represents the portion of a city’s total borrowing by local residents. However, internal debt is often supplement is external debt owed by creditors to the government of a nation. A prime example of an internal debt facility is the U.S. Department of Veterans Affairs, which regularly pays loans that were originated by former citizens of the U.S.
Another example of internal debt is the money owed to the United States by persons who are foreign nationals who do not have a green card. Green card documentation does not provide proof of financial eligibility for foreign individuals to borrow money in the U.S. These are just some of the examples of funds that are owed by non-U.S. citizens. Whether it is international credit, local credit, or military indebtedness, almost all of these financial obligations are owed by non-native individuals to the United States government.
The sources of developing countries’ internal debt can be many and varied. Some developing countries, particularly those in Asia, rely heavily on remittances from foreign businesses. These businesses send workers to the United States to earn a living. While the wages these workers receive are significantly higher than the wages of workers in the U.S., because they live and work in other countries, developing countries must rely on exporting goods and services in order to attract U.S. consumers.
Developing nations have traditionally had poor financial management systems. Because developing nations need assistance with their public finances in order to develop reliable infrastructures, they often must rely on borrowing from foreign creditors. External borrowing increases both the internal debt of a developing country and its dependency on foreign creditors.
A second possible source of developing nation’s internal debt is that of ” sovereign debt “or, debt owed by the national government of a sovereign state. sovereign debt refers to debt owed directly by the sovereign state. For example, when Mexico owes money to the United States government, Mexico is sovereign debt. When the European Union owes money to the United States and the United Kingdom, the European Union is sovereign debt. When the Bank of America owed the United States government money, the Bank of America is sovereign debt.
When comparing the differences between the debt owed by developing nations vis a vie the debt owed by industrialized nations, it is important to consider the difference in jurisdiction. Developed nations, such as Mexico and Brazil, enjoy significant free trade zones with the U.S., which allows them to import goods and services at low tariffs. Because the U.S. government sells these products and services at a discount, these foreign lenders within Mexico and Brazil have access to the U.S. market to satisfy their own internal debt obligations. As a result, both the internal debt owed by Mexico and the external debt owed by the U.S. government are essentially the same. Developed nations also typically enjoy preferential tax treatment from the United States, which means that although they may have a different internal debt burden than developing nations, the benefits received from this preferential treatment far outweigh the disadvantages.
External debt can also arise from various types of financial institutions. One example of this is that of “hedge” or “mutual funds”. These types of financial institutions exist to specifically invest in certain types of assets-usually those that generate positive cash flow-on behalf of investors. While not all foreign governments or central banks have used hedge funds as a means of creating internal debt, many of these institutions do own a portion of financial portfolios that are designed to meet specific economic objectives.
Private sector financial markets are also a significant source of internal debt by the United States government. Many private citizens are able to take out high risk, high interest-free credit on their own. When these individuals owe money to a specific financial institution (such as a bank) or lender within their own country, they then effectively “borrow” that money from lenders within their own country-creating a double layer of internal debt. As these borrowers continue to make their monthly repayments, the amount of debt continues to increase.