I asked ChatGPT a few questions about federal debt and was pleasantly surprised by its answers. It seems to have a far better understanding than many of our Senators, Representatives, President, economists, and even some friends and family.
Here is the conversation:
RM: Regarding the debt limit, when people speak of “federal debt,” what are they referring to?
ChatGPT: When people talk about federal debt, they mean the total amount the U.S. Treasury owes to holders of Treasury securities (bills, notes, bonds, savings bonds, TIPS, etc.). Bottom line: federal debt = all outstanding Treasury securities, whether owned by the public or government accounts.
RM: What is the purpose of Treasury Securities? ChatGPT:1. Safe place to store money
Treasury bills, notes, and bonds are considered the safest financial assets in the world. Individuals, banks, pension funds, insurance companies, and foreign governments buy them as a guaranteed way to hold dollars and earn a bit of interest.
For big investors, they function almost like a savings account at the Fed.
2. Primary tool of monetary policy
The Federal Reserve uses Treasuries to manage interest rates and the money supply. When the Fed buys Treasuries, it pumps bank reserves (money) into the system. When it sells Treasuries, it drains reserves out.
This is how the Fed controls the federal funds rate and, by extension, credit conditions in the economy.
3. Accounting mechanism for government spending
Since the U.S. is monetarily sovereign (it creates the dollar), the government doesn’t need to borrow its own currency to spend. But, Congress has set it up so that when the government spends more than it taxes, the Treasury issues securities equal to the shortfall.
In practice, this just converts reserves (bank dollars) into Treasuries — swapping one form of government liability for another.
Key point: Treasuries don’t “fund” the government the way a household borrows. The U.S. can always create the dollars it owes. Instead, Treasuries exist to:
-provide a risk-free asset for savers,
-give the Fed a tool to steer the economy, and
-comply with Congress’s self-imposed rules on deficit spending.
RM: Why is there a debt limit?1. Historical accident
Before 1917, Congress had to approve each individual bond issue to cover spending. During World War I, that became unworkable, so Congress gave Treasury more flexibility: it could issue debt as needed, but only up to a set ceiling.
That ceiling — the debt limit — was meant as a convenience, not a constraint on whether the U.S. could pay its bills.
2. Symbolic “fiscal discipline”
Supporters say the limit is supposed to force Congress to pause and consider federal spending and borrowing levels. In practice, however, it doesn’t control deficits at all. Those are determined by tax and spending laws already passed.
The debt limit just controls whether Treasury can pay obligations it already owes.
3. Political leverage
Because not raising the limit risks a technical default, it has become a bargaining chip in partisan battles.
Each time the ceiling is reached, opponents of the administration often use it to demand spending cuts or other concessions.
4. Why it doesn’t make economic sense
The U.S. is monetarily sovereign. It issues the dollar, so it can always meet dollar-denominated obligations. The debt ceiling creates artificial “default risk” that doesn’t exist economically — only legally.
Most other advanced countries don’t have a separate debt ceiling. They control deficits through the normal budget process.
So the purpose of the debt limit is political signaling, not financial necessity.
RM: What would happen if we abolished the debt ceiling?ChatGPT: If the debt ceiling were abolished, here’s what would change — and what wouldn’t:
🔹 What would change
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- No more periodic crises
- Treasury could always issue securities (bonds, notes, bills) as needed to match whatever spending Congress already approved.
- No more last-minute showdowns about “default” every year or two.
- No artificial risk of default
- The U.S. would continue to pay interest and redeem maturing securities without interruption.
- Global markets would lose the recurring fear that Congress might deliberately block payment on America’s own obligations.
- Political fights move to the budget process
- Debates over deficits and spending would happen where they belong: when tax and spending laws are written.
- The debt limit would no longer be a hostage-taking device after the fact.
- No more periodic crises
🔹 What would NOT change
-
- Deficits would still exist
- If spending exceeds tax revenue, Treasury would still issue new securities. That’s just how the accounting system is set up.
- Abolishing the limit doesn’t increase spending; it just removes the arbitrary cap.
- Treasuries would still be issued
- Even without a ceiling, Treasury securities would continue to exist, because they serve as the world’s safest savings asset and are essential to monetary policy.
- Inflation risk stays the same
- The real economic constraint on federal spending is inflation, not the debt ceiling.
- If government spends too much relative to the economy’s capacity, prices rise. That risk is unchanged whether or not there’s a ceiling.
- Deficits would still exist
🔹 International comparison
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- Most advanced economies (UK, Germany, Japan, Canada, etc.) do not have a debt ceiling.
- Their governments borrow as needed, automatically authorized by their budget laws.
- The U.S. is an outlier in tying itself to a separate, arbitrary cap.
Bottom line: If the U.S. abolished the debt ceiling, the economy would function more smoothly, the risk of self-inflicted default would vanish, and nothing fundamental about deficits or inflation would change.
The fights over “fiscal discipline” would just shift back to the regular budget process, where they logically belong.
ChatGPT: Right — good catch. The phrase “borrow as needed” hides an important distinction.
Let’s be precise:
1. Monetary Sovereigns (UK, Japan, Canada, US)
-
- They issue their own free-floating currency (pound, yen, Canadian dollar, US dollar).
- They can never “run out” of their currency, since all their debt is payable in what they themselves create.
- Their “borrowing” (issuing government bonds) is really just swapping one government liability (bank reserves) for another (securities).
- Insolvency in their own currency is impossible; inflation is the only real limit.
2. Eurozone countries (Germany, France, Italy, etc.)
-
- They don’t issue their own sovereign currency. They use the euro, which is controlled by the European Central Bank (ECB).
- When Germany or Italy “borrows,” they’re more like a U.S. state or city — they can genuinely default because they don’t control the euro’s creation.
- That’s why Europe has had sovereign debt crises (Greece, 2010s), whereas Japan, with debt >250% of GDP, has not.
So:
-
- UK, Japan, Canada, US → issue their own money; their “borrowing” is voluntary, not necessary.
- Germany and other euro countries → non-sovereign users of the euro; they really do rely on markets to buy their debt, and default risk is real.
👉 That’s the “uh oh.” People often lump them together, but the sovereign vs. non-sovereign distinction is crucial.
ChatGPT:
1. What happens when the U.S. government spends now
-
- Congress authorizes spending.
- Treasury instructs the Fed to credit bank accounts (for Social Security checks, contracts, etc.).
- The Fed simply marks up numbers in the banks’ reserve accounts — new dollars created.
- To balance the books, Treasury then issues securities (bonds, bills, notes) equal to the deficit.
So: spending creates dollars → securities just “mop up” the excess by converting reserves into bonds.
2. Could the U.S. stop issuing bonds entirely?
Yes. Since the government is the monopoly issuer of dollars, it doesn’t need to borrow its own currency. If Congress allowed it, Treasury could:
-
- Spend as authorized,
- Leave the extra dollars as bank reserves in the Fed system,
- And skip the bond sales.
The result would be the same net financial assets in the private sector, just held as reserves (zero-interest money) instead of Treasuries (interest-bearing money).
3. Why they don’t do this
-
- Monetary policy tool: Treasuries let the Fed manage interest rates. If only reserves existed, interest rates would fall toward zero unless the Fed paid interest on reserves (which it actually started doing in 2008).
- Safe savings asset: Global investors, banks, pensions, and foreign governments want Treasuries. They’re the benchmark risk-free asset of the world. Abolishing them would upend financial markets.
- Political optics: Selling bonds makes it look like the government is “borrowing like a household,” which appeals to deficit hawks. It’s a disguise for what’s really just money creation.
4. Real-world examples
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- Japan: Debt >250% of GDP, yet no crisis, no inflation spiral. Why? Because its “debt” is just yen-denominated government liabilities.
- U.S. during COVID (2020–2021): The Fed essentially financed trillions in new spending by creating reserves and buying Treasuries. Functionally, that’s almost the same as direct money creation.
- QE (Quantitative Easing): When the Fed buys Treasuries, it just replaces them with reserves — proving Treasuries are optional.
5. Bottom line
-
- Technically: The U.S. could stop issuing Treasuries tomorrow and still spend without limit.
- Practically: Treasuries exist because they stabilize financial markets, give the Fed policy tools, and maintain the illusion of “borrowing” discipline.
👉 In other words, Treasury securities are not about funding the government, but about managing the financial system.
ChatGPT: Exactly — that’s the crux of it.
Calling Treasury securities “debt” makes them sound like a household loan, which is misleading for a currency-issuing government. A more accurate analogy is:
-
- You buy a Treasury bill → you’re just moving your money from a checking account at the Fed (bank reserves) into a savings account at the Fed (a T-security).
- At maturity, Treasury pays you back by shifting the balance from your “savings” (security) back to your “checking” (reserve account).
No outside funding required, no solvency risk — just accounting entries.
Why “debt” is misleading
-
- Households and firms borrow because they can run out of money.
- The U.S. government can’t — it issues the dollar.
- What we call “debt” is just the government’s promise to return your dollars with a bit of interest, not evidence that it’s short on money.
Why “deposits” makes more sense
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- They’re functionally deposits at the Fed, just with fixed terms and interest.
- They serve as a safe savings instrument for the private sector.
- They are assets for investors, liabilities for the government, but not in the sense of a household debt.
Bottom line: Yes — calling them Treasury deposits or savings bonds would be far closer to reality than “debt.” The language of “national debt” fuels fear and politics, but economically, it’s just the sum of dollar-denominated deposits held at the Fed.
Perhaps some of the media and college professors as well.
In that event, I could retire from this blog and devote my remaining time to something less frustrating — like rolling a boulder up a hill.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell
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MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;
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