"In the year 2000, the U.S. Treasury began actively buying back the public debt; we should all appreciate the tremendous this represents for the Nation as a whole."

So begins a secret government report from 2000 outlining what would happen if the United States actually paid off all of its debt. Eleven years ago, this was, remarkably, a real, if low-risk, possibility. Some economists were projecting that as surpluses accumulated, we might pay off our entire debt by 2012. Economists were projecting that the United States could be debt free by 2012. (Those rubes!)

Graphic showing actual government debt vs. projected debt


Today, the report is a piece of sci-fi wonkery. But kudos to NPR for the FOIA request to unearth it and spark a thought experiment. As David Kestenbaum wrote, the end of debt would mean the end of Treasury bonds. This could spark a kind of mini-crisis. Without U.S. Treasury bonds, where would international investors make their safe, low-interest bearing bets? Where would banks park their cash? Where would we invest surpluses from the Social Security tax for future retirees? How would we determine mortgage interest rates, which are tied to long-term U.S. debt? These are the kind of (ultimately pointless, but conceptually interesting!) questions in the secret report.

One thing to keep in mind is that even if Martians came down and paid off almost all of our debt today, it's possible that very little would change. In the short term, we would have the same benefits. Our borrowing rates could scarcely go any lower. In the long term, we would have the same problems. Government spending, and especially Medicare, is projected to grow much faster than GDP for the rest of the century. Having all our debt paid off might buy us time to fix our problems, but it might not change the near-term or long-term fundamentals. And since Congress only works well against a stiff deadline, it might make our problems even worse.

The first rule of government finances is: Don't make other people think you're borrowing faster than you growing. That's when countries get into trouble. Look at Spain. It had a lowish debt-to-GDP ratio before the crisis began. Now the country is being mentioned in the same sentence as the words "bailout" and "default." That's what happens when a real estate bubble explodes, unemployment jumps to 20 percent, and your lagging in productivity, weighted down by an expensive currency. Bond vigilantes aren't romantic suckers. They're more concerned with whether you'll pay back your next dollar rather than your last one.

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