Every country is heavily in debt, so who is the creditor?

Written by: Zhang Yaqi

Source: Wall Street Watch

Currently, every major country on Earth is deeply mired in debt, raising the century-old question of “if everyone is in debt, then who is lending?” Recently, former Greek Finance Minister Yanis Varoufakis delved into this complex and fragile global debt system in a podcast, warning that the system is facing unprecedented collapse risks.

Yanis Varoufakis stated that the lenders of government debt are far from outsiders, but rather an internal closed-loop system of the state. Taking the United States as an example, the largest creditors of the government are the Federal Reserve and government internal trust funds such as Social Security. The deeper secret is that ordinary citizens hold a significant amount of government bonds through their pensions and savings, making them the largest lenders.

For foreign countries, such as Japan, purchasing U.S. Treasury bonds is a tool for recycling trade surpluses and maintaining the stability of their own currency. Therefore, in wealthy countries, government bonds are actually the safest assets that creditors compete to hold.

Yanis Varoufakis warns that the system will fall into crisis when confidence collapses, and there is historical precedent for this. Despite traditional views that major economies will not default, risks such as high global debt, a high interest rate environment, political polarization, and climate change are accumulating, which could lead to a loss of confidence in the system and trigger disaster.

Yanis Varoufakis summarized the riddle of “who is the creditor”: the answer is all of us. Through pensions, banks, central banks, and trade surpluses, countries collectively lend to each other, forming a vast and interconnected global debt system. This system has brought prosperity and stability, but it is also extremely unstable due to debt levels rising to unprecedented heights.

The issue is not whether it can continue indefinitely, but whether the adjustments will be gradual or suddenly erupt in the form of a crisis. He warned that the margin of error is narrowing, and although no one can predict the future, structural problems such as the disproportionate benefits to the rich and poor countries paying high interest rates cannot persist forever, and no one truly controls this complex system that has its own logic.

The following is a summary of the podcast highlights:

In wealthy countries, citizens are both borrowers (benefiting from government spending) and lenders, as their savings, pensions, and insurance policies are all invested in government bonds.

The U.S. government debt is not a burden imposed on unwilling creditors, but rather an asset they wish to hold.

The United States is expected to pay $1 trillion in interest in fiscal year 2025.

This is a major irony of modern monetary policy: we create money to save the economy, but this money disproportionately benefits those who are already wealthy. While the system is effective, it exacerbates inequality.

Ironically, the world needs government debt.

Throughout history, crises often erupt when confidence dissipates; a crisis occurs when lenders suddenly decide to no longer trust borrowers.

Every country has debt, so who is the creditor? The answer is all of us. Through our pension funds, banks, insurance policies, and savings accounts, through our government's central bank, and through the money created and circulated from trade surpluses to purchase bonds, we collectively lend to ourselves.

The issue is not whether this system can last indefinitely - it cannot, and nothing in history has lasted indefinitely. The question is how it will adjust.

The following is the transcript of the podcast:

Global debt is heavy, and the “mysterious” lenders turn out to be ourselves.

Yanis Varoufakis:

I want to talk to you about something that sounds like a riddle, or like magic. Every major power on Earth is mired in debt. The United States is $38 trillion in debt, Japan's debt is equivalent to 230% of its entire economic scale. The UK, France, Germany, all are deeply in deficit. Yet for some reason, the world keeps turning, money keeps flowing, and the markets continue to function.

This is the riddle that keeps people awake at night: if everyone is in debt, then who is lending? Where is all this money coming from? When you borrow money from a bank, the bank has that money, which is a perfectly reasonable question. It comes from somewhere, including depositors, investors, bank capital, funding pools, and borrowers. It's simple enough. But when we scale this situation to the national level, very strange things happen, and this algorithm no longer makes intuitive sense. Let me explain to you what is actually happening because the answer is far more interesting than most people realize. I have to remind you that once you understand how this system really works, you will never look at money the same way again.

Let's start with the United States, as it is the easiest case to examine. As of October 2, 2025, the federal debt of the United States reached $38 trillion. This is not a typo; it is 38 trillion. To give you a more intuitive sense, if you spent $1 million every day, it would take over 100,000 years to spend that much money.

Now, who holds this debt? Who are these mysterious lenders? The first answer might surprise you: it’s the Americans themselves. The largest single holder of U.S. government debt is actually the U.S. central bank – the Federal Reserve. They hold about $6.7 trillion in U.S. Treasury securities. Take a moment to think: the U.S. government owes money to the U.S. government’s bank. But this is just the beginning.

Additionally, $7 trillion exists in what we call “government internal holdings,” which is money the government owes to itself. The Social Security trust fund holds $2.8 trillion in U.S. Treasury bonds, the military retirement fund holds $1.6 trillion, and Medicare also accounts for a significant portion. Therefore, the government borrows from the Social Security fund to finance other projects, promising to pay it back later. It's like taking money from the left pocket to pay off debt in the right pocket. So far, the U.S. actually owes itself about $13 trillion, which is already more than one-third of the total debt.

The question “Who is the lender” has become strange, hasn't it? But let's continue. The next important category is private domestic investors, which refers to ordinary Americans participating through various channels. Mutual funds hold about $3.7 trillion, state and local governments own $1.7 trillion, in addition to banks, insurance companies, pension funds, and so on. American private investors hold approximately $24 trillion in U.S. Treasury securities.

Now, this is the truly interesting part. The funds for these pension funds and mutual funds come from American workers, retirement accounts, and ordinary people saving for the future. So, in a very real sense, the U.S. government is borrowing from its own citizens.

Let me tell you a story about how this works in practice. Imagine a school teacher in California, she is 55 years old and has been teaching for 30 years. Each month, a portion of her salary is deposited into her retirement fund. That retirement fund needs to invest the money in safe places, ones that can reliably bring returns, so she can enjoy her retirement. What could be safer than lending to the U.S. government? So her retirement fund bought government bonds. That teacher might also be worried about the bond issue. She hears the news, sees those scary numbers, and feels her concerns are justified. But here's the twist: she is one of the lenders. Her retirement depends on the government continuing to borrow and pay interest on those bonds. If the U.S. suddenly pays off all its debts tomorrow, her retirement fund would lose one of its safest and most reliable investments.

This is the first major secret of government debt. In wealthy countries, citizens are both borrowers (benefiting from government spending) and lenders, as their savings, pensions, and insurance policies are all invested in government bonds.

Now let's talk about the next category: foreign investors. This is what most people think of when imagining who holds U.S. debt. Japan holds $1.13 trillion, and the UK holds $723 billion. Foreign investors, including government and private entities, hold a total of about $8.5 trillion in U.S. Treasury securities, accounting for about 30% of the publicly held portion.

But the interesting thing about foreign holdings is: why do other countries buy U.S. Treasury bonds? Let's take Japan as an example. Japan is the third largest economy in the world. They export cars, electronics, and machinery to the U.S., and Americans buy these products with dollars, allowing Japanese companies to earn a large amount of dollars. What happens now? These companies need to exchange dollars for yen in order to pay their domestic employees and suppliers. But if they all try to exchange dollars at the same time, the yen will appreciate significantly, leading to an increase in the price of Japanese export goods and a decrease in competitiveness.

So what will Japan do? The Bank of Japan will buy these US dollars and invest them in US Treasury bonds. This is a way to recycle trade surpluses. You can think of it this way: the US purchases physical goods from Japan, such as Sony TVs and Toyota cars; Japan then uses these dollars to buy US financial assets, namely US Treasury bonds. The funds circulate, while the debt is merely the accounting record of this circulation.

This leads to a crucial point for most parts of the world: U.S. government debt is not a burden imposed on unwilling creditors, but an asset they want to hold. U.S. Treasury bonds are considered the safest financial assets in the world. When uncertainty strikes, such as during wars, pandemics, or financial crises, funds flow into U.S. Treasury bonds. This is known as “hedging.”

But I have been paying attention to the United States. What about other parts of the world? Because this is a global phenomenon. Global public debt has reached $111 trillion, which is 95% of global GDP. In just one year, the debt has increased by $8 trillion. Japan may be the most extreme example. Japan's government debt is 230% of its GDP. If we compare Japan to a person, it would be like earning £50,000 a year but being in debt for £115,000, which falls into the category of bankruptcy. However, Japan is still functioning. The interest rates on Japanese government bonds are close to zero, and sometimes even negative. Why? Because Japan's debt is almost entirely held domestically. Japanese banks, pension funds, insurance companies, and households hold 90% of Japanese government debt.

There are certain psychological factors involved. The Japanese are known for their high savings rate, and they diligently save money. These savings are used to invest in government bonds, as they are seen as the safest way to store wealth. The government then uses these borrowed funds for schools, hospitals, infrastructure, and pensions, benefiting these saving citizens and creating a closed loop.

Operational Mechanisms and Inequality: QE, Trillions in Interest, and the Global Debt Crisis

Now let's discuss its operating mechanism: Quantitative Easing (QE).

The actual meaning of quantitative easing is: central banks create money out of thin air in digital form by hitting keys on a keyboard, and then use this newly created money to purchase government bonds. The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan do not need to raise funds from elsewhere to lend to their governments; instead, they create money by increasing the numbers in accounts. This money did not exist before, and now it has appeared. During the financial crisis in 2008 and 2009, the Federal Reserve created about $3.5 trillion in this way. During the COVID-19 pandemic, they created another huge amount of money.

Before you think this is some kind of elaborate scam, let me explain the reasons why central banks do this and how it should operate. During crises such as financial crises or pandemics, the economy can come to a standstill. People stop spending out of fear, businesses cease investing due to lack of demand, and banks halt lending due to concerns over defaults, creating a vicious cycle. A reduction in spending means a reduction in income, and a decrease in income leads to further cuts in spending. At this point, the government needs to intervene, building hospitals, issuing economic stimulus checks, and rescuing banks on the brink of collapse, taking all emergency measures. However, the government also needs to borrow significantly for this. During abnormal times, there may not be enough people willing to lend at reasonable interest rates. Thus, the central bank intervenes by creating money and purchasing government bonds to maintain low interest rates, ensuring that the government can borrow the necessary funds.

In theory, these newly created currencies will flow into the economic system, encouraging lending and consumption, and helping to end the recession. Once the economy recovers, the central bank can reverse this process by selling these bonds back to the market, pulling back money, and restoring everything to normal.

However, the reality is more complex. The first round of quantitative easing after the financial crisis seemed to work well, as it prevented a complete systemic collapse. But at the same time, asset prices soared, including the stock market and real estate. This is because all the newly created money ultimately flowed into the hands of banks and financial institutions. They do not necessarily lend money to small businesses or homebuyers, but instead use it to purchase stocks, bonds, and real estate. As a result, the wealthy, who own most of the financial assets, became even richer.

Research by the Bank of England estimates that quantitative easing has led to an increase in stock and bond prices by about 20%. However, behind this is the fact that the average wealth of the richest 5% of households in the UK has increased by about £128,000, while households with almost no financial assets have benefited very little. This is a major irony of modern monetary policy: we create money to save the economy, but this money disproportionately benefits those who are already wealthy. While the system is effective, it exacerbates inequality.

Now, let's talk about the cost of all this debt, as it is not free and will accumulate interest. The U.S. is expected to pay 1 trillion dollars in interest in fiscal year 2025. That's right, just the interest expense amounts to 1 trillion dollars, which is more than the country's total military spending. It is the second-largest item in the federal budget, only behind Social Security, and this figure is rising rapidly. Interest payments have nearly doubled in three years, increasing from 497 billion dollars in 2022 to 909 billion dollars in 2024. It is projected that by 2035, interest payments will reach 1.8 trillion dollars annually. In the next decade, the U.S. government will spend 13.8 trillion dollars just on interest, money that is not used for schools, roads, healthcare, or defense, just interest.

Think about what this means: every dollar spent on interest payments is a dollar that cannot be used elsewhere. It is not being used to build infrastructure, fund research, or help the poor; it is simply paying interest to bondholders. This is the current mathematical situation: as debt increases, interest payments will also increase; as interest payments increase, the deficit also grows; and as the deficit increases, more borrowing is required. This is a feedback loop. The Congressional Budget Office estimates that by 2034, interest costs will consume about 4% of U.S. gross domestic product, accounting for 22% of total federal revenue, which means that for every five dollars in tax revenue, more than one dollar will be purely for interest payments.

But the United States is not the only country caught in this predicament. Within the wealthy nations club, the OECD, interest payments currently average 3.3% of GDP, which is more than these governments spend on defense overall. Over 3.4 billion people live in such countries: government debt interest payments exceed their spending on education or healthcare. In some countries, the money the government pays to bondholders is more than what is spent on educating children or treating patients.

The situation is even more severe for developing countries. Poor countries have paid a record $96 billion to service external debt. In 2023, their interest costs reached $34.6 billion, four times what they were a decade ago. In some countries, interest payments alone account for 38% of their export revenues. This money could have been used to modernize their militaries, build infrastructure, and educate their populations, but instead, it flows to foreign creditors in the form of interest payments. Currently, 61 developing countries allocate 10% or more of government revenue to pay interest, with many countries trapped in a situation where their expenditures on repaying existing debt exceed the income from new loans. It's like drowning, paying off a mortgage while watching your house sink into the sea.

So, why don't countries simply default and refuse to repay their debts directly? Of course, defaults do happen. Argentina has defaulted on its debt nine times in history, Russia defaulted in 1998, and Greece nearly defaulted in 2010. But the consequences of default are catastrophic: being shut out of the global credit markets, currency collapse, imports becoming unaffordable, and pensioners losing their savings. No government would choose to default unless it had no other option.

For major economies such as the United States, the United Kingdom, Japan, and strong European countries, default is unimaginable. These countries borrow in their own currencies and can always print more money to repay. The issue is not about payment ability, but about inflation—too much money printing leads to currency devaluation, which is another disaster in itself.

The Four Pillars Supporting the Global Debt System and the Risk of Collapse

This raises a question: what exactly is maintaining the operation of this system?

The first reason is the population structure and savings. The population of wealthy countries is aging, and people's lifespans are getting longer, creating a need for safe places to store retirement wealth. Government bonds perfectly meet this demand. As long as people need safe assets, there will be a demand for government debt.

The second reason is the structure of the global economy. We live in a world with significant trade imbalances. Some countries have large trade surpluses, with exports far exceeding imports; others have huge deficits. Countries with surpluses often accumulate financial claims against deficit countries in the form of government bonds. As long as these imbalances persist, the debt will continue to exist.

The third reason is monetary policy itself. Central banks use government bonds as a policy tool, purchasing bonds to inject funds into the economy and selling bonds to withdraw funds. Government debt acts as a lubricant for monetary policy, and central banks require a large amount of government bonds to operate normally.

The fourth reason is that in modern economies, the value of safe assets precisely comes from their scarcity. In a world filled with risks, safety carries a premium. Government bonds of stable countries provide this safety. If a government actually repaid all its debts, it would lead to a shortage of safe assets. Pension funds, insurance companies, and banks are all struggling to find secure investment channels. Ironically, the world needs government debt.

However, there is one thing that keeps me awake at night and should concern all of us: this system was stable right up until its collapse. Throughout history, crises often erupt when confidence evaporates; the crisis occurs when lenders suddenly decide they can no longer trust borrowers. Such a thing happened in Greece in 2010. Similar situations occurred during the Asian financial crisis in 1997 and in many Latin American countries in the 1980s. This pattern is always the same: everything seems normal for years, then suddenly triggered by some event or loss of confidence, investors panic, demand higher interest rates, governments are unable to pay, and the crisis erupts.

Will this happen to a major economy? Will it occur in the United States or Japan? Traditional views suggest it won't, because these countries control their own currencies, have deep financial markets, and are considered “too big to fail” on a global scale. However, traditional views have been wrong in the past. In 2007, experts claimed that nationwide housing prices would not fall, but they did. In 2010, experts stated that the euro was invulnerable, but it nearly collapsed. In 2019, no one predicted that a global pandemic would bring the world economy to a standstill for two years.

Risks are continuously accumulating. Global debt is at an unprecedented level during peacetime. After years of near-zero interest rates, rates have risen significantly, making debt repayment costs higher. Political polarization in many countries is escalating, making it more difficult to formulate coherent fiscal policies. Climate change will require massive investments, and these investments must be raised under already historically high debt levels. An aging population means a decreasing workforce to support the elderly, putting pressure on government budgets.

Finally, it is a matter of trust. The entire system relies on confidence in the following points: that the government will fulfill its payment commitments, that the currency will hold its value, and that inflation will remain moderate. If this confidence collapses, the entire system will fall apart.

Who is the creditor? We all are.

Returning to our initial question: every country has debt, so who are the creditors? The answer is all of us. Through our pension funds, banks, insurance policies, and savings accounts, through our government's central bank, and through the currency created and circulated for purchasing bonds via trade surpluses, we collectively lend to ourselves. Debt is the claim of different parts of the global economy against others; it is a vast and interconnected network of obligations.

This system has brought immense prosperity, funding infrastructure, research, education, and healthcare; it has enabled governments to operate without the constraints of tax revenue when responding to crises; it has created financial assets that support retirement and provide stability. But it is also extremely unstable, especially as debt levels reach unprecedented heights. We are in uncharted territory, where governments have never borrowed as much as they are now during peacetime, and interest payments have never consumed such a large proportion of the budget as they do now.

The issue is not whether this system can continue indefinitely - it cannot, nothing in history has lasted indefinitely. The question is how it will adjust. Will the adjustment be gradual? Will the government slowly control the deficit while the economy grows faster than the accumulation of debt? Or will it suddenly erupt in the form of a crisis, forcing all painful changes to happen at once?

I don't have a crystal ball, and no one does. But I can tell you this: the longer the time, the narrower the paths between these two possibilities become, and the margin of error shrinks. We have built a global debt system where everyone owes debts to each other, and central banks create money to buy government bonds, with today's spending being paid for by tomorrow's taxpayers. In such a place, the rich gain disproportionate benefits from policies intended to help everyone, while poor countries pay heavy interest to creditors in wealthy nations. This cannot go on forever; we will have to make choices. The only question is what to do, when to do it, and whether we can manage this transition wisely or let it spiral out of control.

When everyone is heavily in debt, the question of “who is lending” is not really a puzzle; it is a mirror. When we ask who the lenders are, we are actually asking: who is involved? What is the direction of this system's development? Where will it take us? The unsettling fact is that no one is truly in control of the situation. This system has its own logic and dynamics. We have created something complex, powerful, and yet fragile, and we are all struggling to navigate it.