Chat GPT knows way more about federal debt than Congress, the media, and many economists do.

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

1. 1. 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.
   2. 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.
   3. 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.

What would NOT change

1. 1. 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.
   2. 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.
   3. 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.

International comparison

• • 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.

Rodger Malcolm Mitchell

Monetary Sovereignty

Twitter: @rodgermitchell

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MUCK RACK: https://muckrack.com/rodger-malcolm-mitchell;

https://www.academia.edu/

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