What Would Happen If the U.S. Paid Off Its Debt?

The United States national debt represents the cumulative borrowing by the federal government over its history. As of June 2025, this debt stood at approximately $36.2 trillion. This figure includes debt held by the public (e.g., Treasury securities) and intragovernmental debt (e.g., non-marketable Treasury securities held by government trust funds). The U.S. government incurs significant annual interest payments to its creditors. For instance, in fiscal year 2024, the government’s net interest expense reached $879.9 billion, representing 13% of all expenditures and marking the third-biggest spending area after Social Security and healthcare services.

Government Fiscal Policy and Operations

Eliminating the national debt would alter the U.S. government’s fiscal landscape, beginning with the cessation of interest payments. In 2024, these payments amounted to $1.1 trillion. Removing this expenditure would free up financial capacity. This space could be directed towards various policy objectives, such as reducing taxes, increasing spending on public programs, or a combination of both.

The U.S. Treasury Department’s functions include managing federal finances, collecting taxes, and borrowing funds. In a debt-free environment, the Treasury’s role in debt issuance would become obsolete. This would eliminate the need for the Bureau of the Fiscal Service to manage public debt. The government would then primarily rely on current tax revenues and other receipts to fund its expenditures.

Without the need to issue new debt, the debt ceiling would become irrelevant. This statutory limit would no longer constrain government financing decisions. The Treasury Department’s advising role on fiscal policy would shift from debt management to optimizing revenue collection and expenditure allocation.

The Federal Reserve’s monetary policy tools are linked to the Treasury bond market. Open market operations (OMOs), a tool, involve buying and selling government securities to influence money supply and interest rates. In the absence of Treasury bonds, the Federal Reserve would need to adapt its approach. While other tools like adjusting reserve requirements, setting the discount window rate, and influencing interest on reserve balances would still be available, the effectiveness of OMOs would be diminished. The Federal Reserve might explore alternative assets for its balance sheet or rely more heavily on direct lending facilities to manage liquidity in the financial system.

Should the government face future deficits without the option of issuing debt, it would have to consider alternative funding mechanisms. This could involve direct taxation, potentially through a significant increase in existing tax rates or the introduction of new taxes. Another possibility would be the direct creation of money, although this approach carries inflationary risks if not managed carefully. The U.S. government would need to establish clear policies for managing any budgetary shortfalls to maintain fiscal stability without recourse to borrowing.

Financial Markets and Interest Rates

The elimination of the U.S. national debt would transform financial markets, particularly impacting the bond market and interest rates. U.S. Treasury securities serve as the global “risk-free” benchmark, underpinning the pricing of financial instruments. Their disappearance would necessitate a recalibration of how risk is assessed and priced across the financial system.

Financial institutions, including banks, pension funds, and insurance companies, rely on Treasuries for various purposes. These securities are a vehicle for liquidity management, serving as liquid assets easily converted to cash. They also function as collateral and are used for regulatory compliance for capital requirements. Without Treasuries, these institutions would need to find alternative safe and liquid assets, potentially shifting towards highly-rated corporate bonds, interbank lending rates, or other sovereign bonds. This transition would require significant adjustments to their balance sheets and risk management practices.

The absence of a deep and liquid Treasury market would alter the “risk-free” rate, which is the rate of return on a zero-risk investment. Currently, the yield on U.S. Treasury bonds serves this purpose. Without this benchmark, other highly-rated fixed-income instruments, such as top-tier corporate bonds or sovereign bonds from stable economies, might emerge as new reference points. Interbank lending rates, which reflect the cost of short-term borrowing between banks, could also gain prominence as a proxy for short-term risk-free rates.

The reallocation of capital by investors would have ripple effects across other asset classes. As investors move away from Treasuries, there could be increased demand for corporate bonds, leading to lower corporate borrowing costs. The stock market might experience an influx of capital as investors seek higher returns, potentially driving up equity valuations. Real estate markets could also see increased investment, influenced by changes in borrowing costs and investor sentiment.

The overall yield curve, which plots interest rates for bonds of equal credit quality but different maturities, would shift significantly. Without Treasury yields as the foundation, the entire structure of borrowing costs for businesses and consumers would be redefined. This shift would impact the cost of mortgages, car loans, and credit card debt, making borrowing potentially cheaper or more expensive depending on the supply and demand dynamics in the new financial landscape. The financial industry would need to develop new pricing models and risk assessment frameworks to navigate this changed environment.

Economic and Societal Consequences

A debt-free U.S. economy would have macroeconomic and societal consequences, impacting individuals and businesses. The potential for inflation or deflation would hinge on how the government utilizes its fiscal flexibility. If the government significantly increases spending or cuts taxes, injecting liquidity without a corresponding increase in productivity, inflationary pressures could rise. Conversely, if fiscal policy became overly conservative, leading to a contraction in government spending and a withdrawal of liquidity, deflationary pressures could emerge.

The impact on Gross Domestic Product (GDP) and economic growth would be complex. Reduced government borrowing could free up capital for private sector investment, potentially stimulating economic growth. However, the disappearance of a safe and liquid Treasury market might disrupt financial stability, creating uncertainty that could deter investment. Changes in interest rates, as determined by the new market dynamics, would directly influence business investment and consumer consumption, which are key drivers of GDP.

Employment and wages would also be affected by these shifts. Increased private sector investment, fueled by lower borrowing costs and available capital, could lead to job creation and wage growth. Conversely, if economic uncertainty or financial market disruptions arise, businesses might scale back expansion plans, potentially leading to job losses or stagnant wages. The reallocation of capital across sectors could also cause shifts in employment patterns.

Changes in interest rates would directly impact consumers. Lower interest rates could make mortgages more affordable, stimulating the housing market and potentially increasing homeownership. Similarly, the cost of car loans and credit card debt would decrease, encouraging consumer spending. Higher interest rates, however, would have the opposite effect, making borrowing more expensive and potentially dampening consumer demand.

Savings, retirement planning, and wealth distribution would also change. With the disappearance of Treasuries, individuals and institutions would need to seek alternative low-risk investments for savings. This could lead to a diversification into other asset classes, exposing savers to different risk profiles. Wealth distribution could be affected by investment strategies and economic growth. Increased capital for the private sector could foster innovation and new business ventures, leading to a more dynamic economy with greater opportunities for entrepreneurship and investment.

Global Financial System

The elimination of U.S. national debt would reshape the global financial system, particularly impacting the U.S. dollar’s role as the world’s primary reserve currency. The dollar’s dominance is supported by the depth and liquidity of the U.S. Treasury market, which provides a safe asset for central banks and international investors to hold as reserves. Without this cornerstone, the dollar’s appeal as a reserve currency would likely diminish, potentially leading to a diversification of global reserves into other currencies.

Central banks globally hold amounts of U.S. Treasuries as part of their foreign exchange reserves, using them to manage exchange rates and provide economic stability. For instance, as of the first quarter of 2025, central banks held around 57.74% of their allocated reserves in U.S. dollars. The sudden absence of Treasuries would force these central banks to reallocate trillions of dollars into other assets, potentially leading to increased demand for bonds from other highly-rated nations or alternative assets like gold. This massive reallocation could cause significant volatility in global financial markets.

International capital flows and foreign direct investment into and out of the U.S. would also be affected. The U.S. Treasury market currently attracts foreign investment, providing a destination for capital. Without this attraction, foreign investors might seek opportunities in other countries, potentially diverting capital away from the U.S. This shift could impact the U.S. balance of payments and its ability to attract foreign capital for domestic investment.

Global trade and financial transactions, which often rely on the dollar for invoicing and settlement, would face disruption. Major commodities, such as oil, are bought and sold using U.S. dollars. The diminished role of the dollar could lead to an increase in trade denominated in other currencies, potentially fostering a more multipolar currency system. This would necessitate adjustments in international payment systems and trade finance mechanisms.

The global financial power dynamics would shift. A reduced reliance on the U.S. dollar could empower other economic blocs and their currencies, potentially leading to a more balanced international financial order. The stability and liquidity of the global financial system, which has relied on the U.S. Treasury market as a safe haven, would be tested. New mechanisms for providing global liquidity and stability would need to emerge to fill this void.