Fiscal Recapture

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In economics, fiscal recapture refers to the ability of a government to obtain income from the same entities to which it owes borrowed funds. In the United States, the Federal Government has a unique ability known as "full fiscal recapture," meaning that, barring debt that is purchased by foreign nations or investors, all U.S. debt is held by bondholders who are also U.S. taxpayers. For this reason, the U.S. Government cannot go bankrupt, as it will always have the power to repay any debts that it owes (hence the common belief that buying U.S. debt is the "safest investment in the world").[1]

Limitations of Fiscal Recapture

It is important to note that, while the Federal Government cannot bankrupt itself, there are certain costs associated with running a budget deficit year after year. If deficit spending is not spent on real assets that encourage future economic growth (investment in capital goods), the national debt will grow relative to the nation's gross domestic product (GDP), thereby diminishing the theoretical capacity of the government to repay what it owes. Large deficits also incur relatively large interest payments, which limit the government's ability to spend in other areas.