The $38 trillion U.S. Treasury debt is under close scrutiny by markets and academics alike. Assessing its sustainability, however, is far from straightforward. It wouldn’t be for any debtor — but it is particularly complex for the U.S. Treasury.

It is tempting to approach the question as one would a corporate or household balance sheet: by asking whether the current value of the debt can be repaid in the future through dollars raised from taxation, net of public spending. In essence, we might try to evaluate the government as a bank would assess a mortgage borrower — by examining its ability to generate future income to service its obligations.

But there is a crucial distinction that changes both the evaluation and its implications. U.S. public debt is denominated in U.S. dollars, and Treasury securities are therefore claims on dollars. Understanding what the dollar actually represents is essential to grasping the core of the issue. The dollar is nothing more than a liability of the Federal Reserve — something that, in a modern fiat monetary system, can be created at will. A dollar at the Fed is a debt that, by definition, can always be fulfilled, since the Fed can issue as many dollars as needed.1

This brings us to the central complication in assessing U.S. sovereign solvency. Is the Federal Reserve truly independent? In a scenario where the Treasury faced difficulties meeting its obligations, would the Fed really refrain from ensuring that those payments are made? If not, then in the extreme case where the Fed fully guarantees Treasury debt, U.S. government bonds would no longer be distinct from dollars themselves. They would be dollars — and thus not subject to any conventional solvency constraint. In that sense, Treasury debt would always be “sustainable,” insofar as the Fed remains solvent — which, operationally, it always is.