Many people repeatedly encounter and believe several common fallacies:
- that the federal government can run out of dollars,
- that it pays its bills by collecting taxes,
- that it borrows money when taxes aren’t enough,
- that the national debt is too high and needs to be reduced, and
- that excessive federal spending causes inflation, which can be fixed by cutting spending.
None of these is true, yet most Americans, including many economists, accept one or more of them. Do you?
Fallacy 1. The federal government can run out of dollars
The U.S. federal government is Monetarily Sovereign, which means exactly what it says. The government is sovereign over the U.S. dollar. It has the unlimited ability to do whatever it wishes with the dollar. It can create as many as it wants, simply by pressing computer keys.
Who says so? Read what a few real experts say: “Monetary Sovereignty. Who Says So?” The abbreviated list includes current and former Federal Reserve chairmen, a Social Security Trusted, economists (including a Noble Prize winner) and a representative of the St. Louis Federal Reserve Bank.
The fact: It is functionally impossible for the federal government to run out of dollars unless it wants to. To quote one of the experts: ““The U.S. government is not like a household. It literally prints money, and it can’t run out. The government can always finance its spending by creating money.”
Fallacy 2. The federal government pays its bills by levying taxes
Not only is the federal government unlike a household, it also is unlike state and local governments, which are monetarily non-sovereign. Because they do not have the unlimited ability to create dollars, they need income to pay their bills. That income includes taxes and borrowing.
The federal government also levies taxes, but for different reasons:
- To control the economy by taxing what the government wishes to discourage and by giving tax breaks to what the government wishes to reward. Examples are “sin” taxes on cigarettes and alcohol and tax deductions for charitable giving.
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To assure demand for the U.S. dollar by requiring taxes be paid in dollars.
The federal government pays all its bills with newly created dollars. It has no financial need for tax dollars.
Fallacy 3. The federal government borrows money when taxes aren’t enough
Having the unlimited ability to create dollars, the federal government never borrows dollars. Much of the confusion about this is semantic, relating to the words bills, notes, and bonds.
In the private sector, bills, notes and bonds denote debt. When you or I pay a bill, we are paying a debt. When we sign a note, we are signing a debt. When we buy a corporate bond, we are buying a corporate debt.
And yes, even a dollar bill signifies a debt of the federal government, which owes the holder of the dollar bill the full faith and credit of the federal government.
To make matters a bit more confusing, dollar bills have the words, “Federal Reserve Note” printed on them.
A dollar bill is unlike an ordinary debt in several important ways:
- It never has to be repaid in anything else.
- It has no maturity date.
- It pays no interest.
- The government creates it at will.
- The issuer cannot become unable to “pay” more dollars.
Thus, a dollar bill is identical to a Treasury bill that pays no interest and has no maturity date.
So, calling Treasury bills “debt” uses accounting language that resembles household or business debt but functions very differently.
Dollar bills are part of the federal “debt,” as are Treasury bills, Treasury notes and Treasury bonds, none of which resemble private sector debt.
Federal debt is paid off by exchanging it for other federal debt. Visualize you always being able to pay off your mortgage and credit card debts simply by signing up for more debt. You never would be unable to pay your debts; you endlessly could issue new debt to pay old debt.
That is exactly how the federal government works. It pays off all its debt by issuing more debt, i.e. dollar bills. It never can be unable to pay off old debt because it always can issue new debt.
While personal debts weigh heavily on individuals, the federal debt doesn’t burden the federal government. Worries about its size are largely misplaced, as the government could, if it wished, instantly cover a trillion or even a hundred trillion dollars in debt simply by issuing more debt in the form of dollar bills.
The federal government never borrows money (“Borrow” is another word that means something different for the federal government vs. the private sector). It simply exchanges old debt for new debt, which it can do, forever.
Fallacy 4. The national debt is too high and needs to be reduced.
We already have discussed the fact that government pays off the national debt by exchanging T-bills, notes, and bonds for more national debt, i.e., dollar bills. The only way to reduce the national debt is to reduce the amount of money in the economy. And that leads to recessions and depressions.
If dollar bills are part of the national debt, how is the national debt ever reduced?
The semantic confusion comes from lumping together very different things under the single label “national debt.” There are several major categories:
- currency (dollar bills),
- bank reserves,
- Treasury securities (T-bills, notes, bonds).
The term “national debt” usually refers to outstanding Treasury securities, not the total amount of currency in circulation. When these securities mature, the government reduces the securities account and increases a checking-type account (bank reserves).
In other words, one type of government liability is simply swapped for another. A dollar bill is just as much a federal liability as a Treasury bill, note, or bond.
Would you like to reduce the real federal debt? Burn a dollar bill.
Fallacy 5. Excessive federal spending causes inflation, which can be fixed by cutting spending.
In one sense, this is a tautology. By calling it “excessive,” we already have made a claim: “When is federal spending excessive? When it causes inflation.”
And we even have a common slogan for this: “Too much money chasing too few goods and services.”
We have shown in previous posts, that it is shortages (i.e., too few goods and services) that are the cause of inflations. There can be no inflation unless there are shortages.
The real question becomes, “what caused the shortages?” Was it “too much federal spending” or some other factors? This is the key question, because federal spending is absolutely necessary for a growing economy.
Gross Domestic Product = Federal Spending + Non-federal Spending + Net Exports
Insufficient federal deficit spending has caused every recession and depression in U.S. history.
All U.S. depressions come come on the heels of federal surpluses.
1804-1812: U. S. Federal Debt reduced 48%. Depression began 1807.
1817-1821: U. S. Federal Debt reduced 29%. Depression began 1819.
1823-1836: U. S. Federal Debt reduced 99%. Depression began 1837.
1852-1857: U. S. Federal Debt reduced 59%. Depression began 1857.
1867-1873: U. S. Federal Debt reduced 27%. Depression began 1873.
1880-1893: U. S. Federal Debt reduced 57%. Depression began 1893.
1920-1930: U. S. Federal Debt reduced 36%. Depression began 1929.
1997-2001: U. S. Federal Debt reduced 15%. Recession began 2001.
What led to the shortages that that caused inflations?
Every major inflation has been caused by factors other than federal spending. (See: The inflation myths debunked. It’s never “money-printing.” It’s always shortages.)
Because of our belief in the Five Fallacies, we’ve ended up paying far too many taxes while missing out on easily affordable health care for every American, quality education, updated infrastructure, the end of poverty, and a fairer distribution of income, wealth, and power between the rich and everyone else.
All of these are within reach—if only we understood the facts.
Now, compare the above with these excerpts from an editorial in the Florida Sun-Sentinel:
As Social Security withers, Congress dithers
By The Sun Sentinel Editorial Board, Opinion Editor Steve Bousquet, Deputy Opinion Editor Dan Sweeney, editorial writers Pat Beall and Martin Dyckman, and Executive Editor Gretchen Day-Bryant. April 8, 2026
Americans who might agree on little else share a common interest in preserving Social Security and Medicare. Nearly all of us are either enrolled in those universal programs or expect to be as we get older. Social Security is far and away the nation’s most important safety net.
So, it should alarm Republicans, Democrats and independents that Congress is doing nothing to prevent the enormous benefit reductions threatening both programs in just seven years. That is when the trust funds are on track to exhaust their reserves and reduce payouts to no more than what existing earmarked taxes will collect.
There’s no reason for trust funds to cut back on anything—in fact, there’s no need for them at all. The federal government could fund Social Security the same way it funds the military, the White House, Congress, the Supreme Court, and most other federal programs: simply vote and create the dollars.
A lifeline for millions Across the board, everyone receiving old age or survivor assistance from Social Security would get 23% less. For the average recipient, who gets about $2,000 a month before taxes, that’s a $600 cut.
No need for cuts. The government has infinite money.
For every four of 10 retired Americans, Social Security provides at least half of their income. For one of every seven, it is more than 90%. Social Security keeps 20 million older people and a million children out of poverty. To let them down would be a catastrophic national disgrace.
Medicare would have to reduce spending by 11%, most of which would impact doctors and hospitals and result in diminished care. A reasonable tax increase would avert that. The longer Congress puts off reckoning with these problems, the more difficult the solutions will be.
Reductions would be the result of ignorance.
Earmarking tax revenue from Social Security to its trust fund is one fix proposed to prevent the 2033 shortfall.
Tax earmarking is not necessary.
“It’s not possible for us to take care of daycare, Medicaid, Medicare, all these individual
things,” President Trump told an Easter Sunday luncheon at the White House. “We have to take care
of one thing: military protection. We have to guard the country.”
The usual Trumpian lie. It is easily possible to “take care of daycare, Medicaid, all these individual things” while also taking care of the military. But the rich want you to believe that you must sacrifice.
Few members of Congress are in favor of impending cuts in Social Security and Medicare, but it would be just as daunting to find many to specify how they would prevent it.
Ignorance comes with consequences. Congress could, and should, vote to support Social Security and Medicare, and like all other federal funding, the necessary dollars would simply be created.
The Brookings Institution summarized them in a white paper that proposed making Social Security fully solvent for another 75 years. The plan would raise the ceiling on income subject to Social Security tax and increase the tax rate from 12.4%, paid jointly by workers and employers, to 12.6%; raise the retirement age, in stages, from 67 to 70 for people in the highest two fifths of income brackets; and earmark to the trust fund all taxes paid on Social Security benefits.
The Brookings plan is an unnecessary ode to ignorance. Not one of its benefit cutting, tax increasing suggestions is necessary.
It would fully tax Social Security benefits paid to individuals with adjusted gross incomes of $100,000 or $125,000 for couples. It would base payouts on the highest 40 years of earnings rather than the present basis of 35, and it would reduce some spousal and child benefits for retirees.
The Brookings program asks for something from everyone, but not too much from anyone.
Either the Brookings people are ignorant of the facts or being deliberately deceptive.
The urgent need for this is the falling birthrate and the declining ratio of taxpaying workers to retired beneficiaries. That is a real fiscal time bomb that could set off generational warfare in Washington.
The ratio of taxpaying workers to benefits is irrelevant. Federal taxes don’t fund anything; all federal spending is covered by the creation of federal money.
Congress is already a day late to the duty of saving it. It’s one of the most important issues that voters should demand every candidate address in this election year.
No, every candidate should be honest and not pretend that the federal government is financially constrained by taxes. Why do they keep up the pretense? The wealthy run America, and the tax code only widens the gap in income, wealth, and power between them and everyone else.
Rodger Malcolm Mitchell
Twitter: @rodgermitchell
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A Government’s Sole Purpose is to Improve and Protect The People’s Lives.
MONETARY SOVEREIGNTY
#Monetary Sovereignty - Mitchell 