If, for example, the US were borrowing money at 3% by issuing T-Bills, it would just buy a basket of high-grade foreign and corporate debt at 3.5% and earn a spread of 0.5% while continuing to provide adequate liquidity of T-Bills.
The bond market actually did very well - in 1998 there was approx $167BB of govt debt issued while in 2008 there was $480BB.
http://www.brr.com.au/event/43083/recent-developments-in-the... for a boring speech about it by the RBA governor
The US has no reason to issue T-Bills in a zero-debt scenario, through. The only reason that the US government has to sell bonds like T-Bills is to make up for the difference between income(taxes and fees) and costs. If the budget is completely balanced, there is no reason for the government to sell off bonds of any form, since they would need to pay them off with interest at a later date.
However, I was assuming that the size(and budget) of the federal government is large enough that if it were completely balanced, and all debt was paid off, they would have enough surplus cash(or the ability to redirect funds) to invest in a large-scale project like that. Short of another world war, I don't think that there are really any projects that would absolutely require this kind of immediate investment by the public.
You can always go bigger, and in such an incredibly desirable position as you describe, the potential economic feedback loop from going even further with investment in infrastructure and public services is too big to ignore.
Imagine an alternate universe in which there is still a Glass-Steagall act, the Bush tax cuts were never passed, the Afghanistan and Iraq wars were never started, the financial crisis was limited to a few isolated dominoes, and the US is on track to pay off its sovereign debt completely by 2016. We could build a competent, national network of high speed rail without borrowing anything. Or, we could borrow again and build a world-class rail network, invest heavily in education, transform the nation's healthcare system, revitalize NASA... There is always room for more investment.
Also, this is a really depressing fantasy to return from.
We would have ended up in the hole anyway, since the revenue burst was bubble induced and destined to go down. But even if that wasn't true they would never have allowed the surplus to continue.
Even then it was imaginary, because the growth in Social Security and Medicare spending was always going to outstrip revenue under the rosiest of scenarios.
That's the challenge. How would you replace such a secure asset? After the US, Japan and EU used to be pretty solid economies, but not anymore.
So you would be exchanging one liability of the government for another one. If you are so blasé about high levels of outstanding government liabilities in the form of cash (imagine the amount of physical bills that would have to be printed! ;-) ), then why not just stick with what works today, namely high levels of outstanding government liabilities in the form of debt?
I don't want to pick on you specifically, but man would those discussions on HN be more fruitful if people were aware of basic facts in macro-economic accounting.
Precious metals are much safer than US debt.
Most tangible things (metals, real estate, income producing businesses) are safer than currencies that can be created out of thin air.
Here is a historical chart of the price of gold (in dollars) since 1833.
http://www.nma.org/pdf/gold/his_gold_prices.pdf
Dollars originally were redeemable in gold. But because of inflation of the money supply (i.e. creating more dollars) the US didn't have enough gold to pay their outstanding debt (i.e. the dollars out there being held by other countries).
So Nixon was forced to sever the dollar's tie with gold in 1971. At that point the dollar is a fully flexible (or fiat) currency.
Look at the price of gold in that chart since 1971.
That's not the value of gold going up. It's the value of the dollar going down.
Gold supply is relatively stable. It takes investment and time to mine new gold, so only a small amount is introduced into the economy each year.
New dollars are added to the economy at a terrifying rate. Every fiat currency in the history of mankind has always gone to zero.