Unkle Sam explains all

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http://www.gao.gov/special.pubs/longterm/debt/debtbasics.html

What is the difference between the two types of federal debt?   


Debt held by the public essentially represents the amount the federal government has borrowed to finance cumulative cash deficits. Debt held by the public represents a burden on today's economy as borrowing from the public absorbs resources available for private investment and may put upward pressure on interest ratesThe cost of borrowing or the price paid for the rental of funds (usually expressed as a percentage).. Moreover, the interest paid on this debt may reduce budget flexibility because, unlike most of the budget, it cannot be controlled directly.

Debt held by government accounts represents the cumulative surpluses, including interest earnings, of these accounts that have been invested in Treasury securities. The special Treasury securities held in these government accounts represent legal obligations of the Treasury and are guaranteed for principal and interest by the full faith and credit of the U.S. government. This debt reflects a burden on taxpayers and the economy in the future.
 
Whenever a government account needs to spend more than it takes in from the public, the Treasury must provide cash to redeem debt held by the government account. The government must obtain this cash by increasing taxes, cutting spending, borrowing more from the public, retiring less debt (if the budget is in surplus), or some combination thereof.

Debt held by the trust funds, such as Social Security and Medicare, is not equal to the future benefit costs implied by the current design of the programs and, therefore, does not fully capture the government's total future commitment to these programs. For additional information about trust funds, see GAO, Federal Trust and Other Earmarked Funds: Answers to Frequently Asked Questions.

Only debt held by the public is reported as a liabilityA probable future outflow or other sacrifice of resources as a result of past transactions or events. Generally, liabilities are thought of as amounts owed for items or services received, assets acquired, construction performed (regardless of whether invoices have been received), and amount received but not yet earned. on the consolidated financial statements of the United States governmentThe consolidated financial statements present consolidated and summarized financial information from the various federal government agencies and departments. They are part of the Financial Report of the United States Government, referred to as the Consolidated Financial Report (CFR). The goal of the CFR is to make available to every American a comprehensive overview of the federal government’s finances.. Debt held by government accounts is an asset to those accounts but a liability to the Treasury; they offset each other in the consolidated financial statements.

What is the debt limit?     


Congress and the President have enacted laws to establish a limit on the amount of federal debt that can be outstanding at one time. The gross debtGross Debt (Total Debt): The total amount of outstanding federal debt, whether issued by the Treasury or other agencies and held by the public or federal government accounts excluding some minor adjustments, is the measure that is subject to the federal debt limitA legal ceiling on the amount of gross federal debt (excluding some minor adjustments), which must be raised periodically to accommodate additional federal borrowing. . The debt limit does not restrict Congress' ability to enact spending and revenue legislation that affect the level of debt or otherwise constrain fiscal policy; rather, the debt limit restricts the Department of the Treasury's authority to borrow to finance the decisions enacted by the Congress and the President (for more information, see Debt Limit: Delays Create Debt Management Challenges and Increase Uncertainty in the Treasury Market). As a result, as the government neared the debt limit, Treasury often adjusted its normal cash and debt management operations. In the past, Treasury has taken a number of extraordinary actions such as temporarily disinvesting securities held as part of federal employees' retirement plans to meet the government's obligations as they came due without exceeding the debt limit, until the debt limit was raised. For more information, see:
Debt Limit: Analysis of 2011-2012 Actions Taken and Effect of Delayed Increase on Borrowing Costs.
Debt Ceiling: Analysis of Actions Taken during the 2003 Debt Issuance Suspension Period.
Debt Ceiling: Analysis of Actions During the 2002 Debt Issuance Suspension Periods.
Debt Ceiling: Analysis of Actions During the 1995-1996 Crisis.