Everything you think you know about the national debt is probably wrong. Here’s what’s really happening.
Today is June 14, 2025, the day when No Kings protests are taking place across the U.S. I thought it would be nice to rework this old post from my blog chevan.info
Calling out my own biases: Before I start, let me be upfront about something that shapes everything I’m about to tell you. I believe money always emerges out of a systemic need to coordinate who does what work and who gets what stuff. It didn’t start as property that individuals owned—it emerged as a tool when societies needed to organize production and trade.
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Most people today think of money like private property—something you own, save, and spend. You hear this in everyday phrases like “taxpayers’ money,” “the government is spending our money,” or “we can’t just print money because it would steal from savers.” This view treats dollars like scarce objects, similar to gold coins that get passed from person to person. This is what I call hard money thinking—the idea that money is a limited resource that gets moved around between people. There was actually a time after World War II when Western economies did operate this way, with currencies bound by gold through the Bretton Woods system.
But things actually changed after 1971 when President Nixon ended the gold standard. Before that, other countries could demand gold from the U.S. in exchange for dollars, which meant we could literally run out of money. After 1971, no country could make that demand—the dollar became pure government creation. We now live in a soft money economy where money is created and managed by the government to coordinate economic activity. Money isn’t scarce like gold—it’s more like a measurement system or a set of rules that helps organize who produces what and who gets access to goods and services.
My thinking also uses a three-sector model of the economy: the public sector (government), the private sector (businesses and households), and the foreign sector (other countries and their governments). This matters because money flows between these sectors, and understanding these flows helps explain how fiscal policy actually works.
There’s no middle ground between hard money thinking (money as scarce property) and soft money reality (money as a coordination tool), and they lead to totally different conclusions about debt, government spending, and what’s actually possible in our economy. Because I see money as a tool and I’m a systems person, I believe the change from hard money to soft money gives us more options about what to do and can make our economy stronger and people stronger—if we use the options available to us. But we have to know what those options are. Hard money thinking has an appeal like old ideas have an appeal – we know them. But that is not what made America great. Looking to the future, navigating problems and building systems that scale was. We need to do that again.
Ok- with the framework I just outlined in mind, let’s examine what’s actually happening with the national debt.
The U.S. national debt sits at over $33 trillion, and politicians are freaking out. Again. You’ve heard the scary comparisons: “It’s like maxing out your credit cards!” “We’re bankrupting our children!” “The government is spending like drunken sailors!”
But here’s what might blow your mind: The national debt is caused by congressional UNDERSPENDING. We could pay it all off tomorrow if we wanted to. But we don’t actually have to—ever—because we live in a soft money economy where individual bonds are actually investor products offered by the government and the accumulated national debt is just private sector wealth (where else does it go?).
This isn’t about magical thinking—it’s about understanding what changed in 1971 and why our political debates haven’t caught up.
What Changed in 1971: The End of Hard Money
In 1971, President Nixon ended the gold standard. The immediate trigger was that other countries (especially France) were demanding so much gold in exchange for their dollars that the U.S. was running out. Rather than let foreign governments drain American gold reserves, Nixon simply ended their ability to make these demands.
This completely transformed what government debt means:
- Before 1971: Treasury bonds were IOUs backed by gold the government might not have
- After 1971: Treasury bonds are IOUs payable in dollars that only the government can create
From that point on, $1 could not be exchanged for $1 of gold—just $1.
This means the federal government (who makes the money) can always pay its debts. Yet our entire political discourse still operates as if we’re living under the gold standard.
Three Explanations for Why Everything You’ve Heard Is Wrong
Explanation #1: The Debt Grows Because Congress UNDERSPENDS
If the government can create dollars and always pay its debts, why does the debt keep growing? The answer reveals how Congress is still using hard money budgeting in a soft money world.
Here’s what actually happens now, but viewed through two different lenses:
Hard Money Thinking (Outdated):
- Congress authorizes spending beyond tax revenue, creating dangerous debt
- Treasury must “borrow” money by issuing bonds to cover the shortfall
- Bonds have maturity dates when the government owes repayment
- Congress underspends by only budgeting for interest, forcing more borrowing
- Debt grows through “rollovers” – a dangerous spiral
Soft Money Reality (How It Actually Works):
- Congress authorizes spending that adds money to the private sector
- Treasury offers safe investment vehicles (bonds) to absorb excess money and manage interest rates
- Bonds have maturity dates when investors can choose to roll over or cash out
- Congress chooses to keep offering new bonds instead of shrinking the bond market
- The safe asset market grows, providing stability for the entire credit system
Here’s the key mechanism: When bonds mature, Congress only budgets for the interest payments, not the principal. This forces the principal to be “rolled over” into new debt, making the total debt grow.
If Congress wanted to keep the national debt at zero, it would just need to appropriate money for both the interest and the principal when bonds mature. We could end this cycle anytime with a simple vote to fully fund debt repayment.
But the real question is whether we’d want to end it—which brings us to our next point.
Explanation #2: We Could Pay It All Off Tomorrow
In our soft money system, the government has unlimited capacity to create dollars. There is no operational constraint preventing Congress from appropriating $33 trillion tomorrow to pay off every Treasury bond.
The Federal Reserve could credit every bondholder’s account instantly. Every Treasury bond could be retired. The national debt could go to zero.
This isn’t theoretical—it’s how our monetary system actually operates. The only thing stopping this is political choice, not economic limitation.
Explanation #3: We Don’t Have To Pay It Off (And Shouldn’t)
Here’s the part that breaks people’s brains: In a soft money system, Treasury bonds aren’t really debts the government owes—they’re investment products the government creates.
Think about it: when you owe someone money, you have to figure out how to get that money from somewhere else to pay them back. But the government doesn’t have to “get” dollars from anywhere—it creates them. There’s no risk the government won’t be able to find the dollars to pay bondholders because it literally makes dollars.
Treasury bonds serve essential economic functions:
They provide safe assets for the financial system. People and institutions need secure places to store wealth. Treasury bonds, backed by the U.S. government’s ability to create dollars, are among the safest investments in the world.
They create a foundation for credit markets. Banks, pension funds, and other financial institutions use Treasury bonds as collateral and safe assets that underpin lending throughout the economy.
They represent private sector wealth. Every dollar of government debt is a dollar of private savings. When politicians talk about “paying off the debt,” they’re talking about eliminating these safe savings vehicles.
If the government paid off all Treasury bonds tomorrow, it would remove the safest investment option in the global economy, destabilizing financial markets and forcing investors into riskier assets.
The “national debt” isn’t a burden—it’s essential financial infrastructure. There are legitimate questions about optimal size and management, but the idea that we need to eliminate it is based on outdated hard money thinking.
The Real Crisis: Hard Money Thinking in a Soft Money World
While we debate imaginary debt crises, we’re missing real opportunities and creating real risks:
What We’re Missing:
- Infrastructure investments that could boost productivity for decades
- Educational investments that could transform our workforce
- Climate adaptation that could save trillions in damage
- Healthcare efficiency that could reduce costs for everyone
The Real Risks:
- Inflation: If government spending exceeds our economy’s productive capacity
- Currency instability: If other countries lose confidence in U.S. economic management
- Political dysfunction: Debt myths fuel government shutdowns and gridlock
Notice what’s missing from the real risks? Running out of money or being unable to pay our debts.
This mismatch between hard money thinking and soft money reality is preventing us from using our full economic potential. The money is never the constraint. The constraints are real resources and political will.
But this isn’t just a domestic policy issue—it’s becoming a serious geopolitical problem. Other countries have figured out these monetary realities and are using them to accelerate their development while the U.S. stagnates in debt panic. China builds high-speed rail networks and green energy infrastructure without worrying about “how to pay for it.” European nations invest heavily in education and healthcare. Meanwhile, America debates whether we can “afford” to fix our crumbling bridges or address climate change.
Let’s Wrap This Up:
1. The National Debt is Caused by UNDERSPENDING: ✓ Explained. Congress systematically underfunds debt service, forcing perpetual rollovers that grow the debt.
2. We Can Pay it Off Anytime: ✓ Explained. The government can create any amount of dollars needed to retire all bonds. The operational capacity exists right now.
3. We Don’t Have To Because We Have a Soft Money Economy: ✓ Explained. The “debt” provides essential safe assets. Treasury bonds stabilize our financial system and eliminating them would cause more harm than good.
The real crisis is the opportunity cost of fighting imaginary constraints.
We’re using hard money mental models in a soft money reality. While we fight these imaginary financial constraints, our infrastructure crumbles, inequality grows, and challenges like climate change accelerate.
Breaking free from hard money thinking isn’t just about getting the economics right. It’s about reclaiming our democratic capacity to build the future we want.
The question isn’t whether we can afford to invest in that future. The question is whether we can afford not to.