From Jack Cukjati - WHAT IF ??? Japan 20T trade is returned ???
- Jim Costa
- 4 hours ago
- 3 min read
if 20 trillion dollars of debt is returned to the United States on one day, what would be the result
ChatGPT said:
Thought for 16s
Short answer up front:
If $20 trillion of U.S. federal debt were suddenly “returned”/paid off in one day, it would be enormous but also messy — it would sharply cut headline debt (from ≈$38T to ≈$18T), reduce future interest costs by hundreds of billions per year, and trigger large, fast-moving effects in money markets, interest rates, bank reserves and the dollar. AP News+1
Below I’ll walk through the main channels, what would likely happen, and the practical/legal caveats.
1) Two very different ways $20T could be “returned” — and they have opposite short-run effects
Holders sell Treasuries into the market (or the Fed buys them): if the Federal Reserve or banks buy huge amounts of paper and create reserve balances to pay sellers, the result is a huge increase in bank reserves / broad money unless the Fed sterilizes (sells assets or issues its own liabilities later). That is inflationary pressure unless the Fed acts quickly to withdraw liquidity. The mechanics of Fed/Treasury operations matter a lot. Bank Policy Institute+1
Holders physically “redeem” by sending existing cash/deposits to the Treasury: that would shift private bank deposits into the Treasury General Account (TGA) at the Fed. That reduces bank reserves and could temporarily tighten liquidity, pushing short-term rates up unless the Fed offsets. The Treasury’s cash account and “extraordinary measures” rules would also matter. FiscalData+1
2) Immediate and medium-term market effects (likely)
Bond yields: a $20T one-day change would cause violent moves in yields. If the public suddenly holds much less Treasuries, the supply/demand shock could push yields either down (if the Fed soaked up bonds) or up (if reserves were drained and money markets tightened). The Fed’s response would determine the direction. Federal Reserve Bank of San Francisco
Interest costs for the government: cutting $20T of interest-bearing debt reduces annual interest outlays substantially. As an illustration: if that $20T carried a 2–5% average interest rate, annual interest savings would be roughly:
2% → $400 billion/year
3% → $600 billion/year
4% → $800 billion/year
5% → $1.0 trillion/year
(These are simple, illustrative calculations — actual savings depend on the exact securities retired and their coupons.)
Fiscal picture: lower outstanding debt lowers future interest expense and borrowing requirements, all else equal — but the single-day shock could raise market borrowing costs or create stress that offsets some savings near term. AP News
3) Banking system & monetary policy interactions
Bank reserves and short rates would swing strongly depending on how payments are made. The Federal Reserve uses Treasury securities as a core tool of monetary policy; removing a huge amount of marketable Treasuries or dramatically increasing reserves would force the Fed into large open-market operations to keep control of its policy rate. See Fed explanations of how buying/selling Treasuries changes reserves and rates. Federal Reserve Bank of San Francisco+1
Inflation/deflation risk: if the event increases broad liquidity (Fed monetizes the change), inflation risk rises. If it drains commercial bank liquidity (Treasury accumulates deposits at the Fed), money markets tighten and short-term rates spike — a contractionary shock. The net effect depends on how the Fed and Treasury respond practically.
4) Exchange rate, asset prices, and global spillovers
A sudden $20T flow would roil global FX and capital markets. If foreign holders repatriated funds or reallocated reserves, the dollar could move sharply (likely appreciate if foreigners sell other currencies to buy dollar assets, or depreciate if they sell dollars to get out of dollar assets) — direction depends on transaction flows and central-bank responses. Stock markets would almost certainly be volatile.