Every country is heavily indebted, so who are the creditors?

Original title: Every country is heavily indebted, so who are the creditors? Former Greek Finance Minister: "All of us."

Original author: Zhang Yaqi, Wall Street Insights

Currently, every major power on Earth is mired in debt, raising the age-old question: "If everyone is in debt, then who is lending?" Recently, former Greek Finance Minister Yanis Varoufakis provided an in-depth analysis of this complex and fragile global debt system in a podcast, warning that the system faces an unprecedented risk of collapse.

Yanis Varoufakis argues that the lenders of government debt are far from outsiders, but rather a closed-loop system within the nation . In the United States, for example, the largest creditors are the Federal Reserve and internal government trust funds such as Social Security. A deeper secret lies in the fact that ordinary citizens hold substantial amounts 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 currencies. Therefore, in wealthy countries, government bonds are actually the safest asset that creditors are vying to hold.

Yanis Varoufakis warns that the system will face a crisis when confidence collapses, as history has shown . While conventional wisdom holds that major economies will not default, risks such as high global debt, a high-interest-rate environment, political polarization, and climate change are accumulating and could lead to a loss of confidence in the system, potentially triggering a catastrophe.

Yanis Varoufakis summarizes the "who is the creditor" puzzle as: the answer is all of us . Through pension funds, 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 has also become extremely unstable due to unprecedented debt levels.

The problem is not whether it can continue indefinitely, but whether the adjustment will be gradual or erupt suddenly 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 of the rich and the high interest rates paid by poor countries cannot last forever, and no one truly controls this complex system with its own logic.

The following is a summary of the podcast's highlights:

• In wealthy countries, citizens are both borrowers (benefiting from government spending) and lenders, because their savings, pensions, and insurance policies are invested in government bonds.
• U.S. government debt is not a burden imposed on unwilling creditors, but rather an asset they want to own.
• 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.
• Paradoxically, the world needs government debt.
• Throughout history, crises have often erupted when confidence wanes; a crisis occurs when lenders suddenly decide to no longer trust borrowers.
• 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 money created and circulated by trade surpluses to buy bonds, we collectively lend to ourselves.
• The problem isn't whether the system can continue indefinitely—it can't, nothing in history lasts indefinitely. The problem is how it will adjust.

The following is a transcript of the podcast:

The world is burdened with debt, and the "mysterious" lender turns out to be one of their own.

Yanis Varoufakis:

I want to talk to you about something that sounds like a riddle, or even magic. Every major power on Earth is mired in debt. The United States has $38 trillion in debt, and Japan's debt is equivalent to 230% of its entire economy. Britain, France, and Germany are all deeply in deficit. Yet, somehow, the world keeps turning, money keeps flowing, and markets keep functioning.

This is the sleepless mystery: if everyone is in debt, then who is lending it out? Where does all this money come from? When you borrow money from a bank, the bank owns the money—a perfectly reasonable question. It comes from somewhere, including depositors, investors, bank capital, pools of funds, and borrowers. Simple. But when we extend this to the national level, something very strange happens, and the algorithm no longer makes intuitive sense. Let me explain what actually happens, because the answer is far more interesting than most people realize. I must warn you, once you understand how this system truly works, you will never look at money the same way again.

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

So, who holds this debt? Who are these mysterious lenders? The first answer might surprise you: the Americans themselves . The largest single holder of US government debt is actually the US central bank—the Federal Reserve. They hold approximately $6.7 trillion in US Treasury bonds. Think about it for a moment: the US government owes money to the US government bank. But this is just the beginning.

The remaining $7 trillion exists in what we call "government-held" form—money the government owes 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 Trust Fund to finance other programs, promising to repay it later. It's like taking money from the left pocket to pay off debt in the right. To date, the U.S. actually owes itself approximately $13 trillion, which is more than one-third of its total debt.

The question of "who are the lenders" gets a bit odd, doesn't it? But let's continue. The next important category is private domestic investors—ordinary Americans participating through various channels. Mutual funds hold about $3.7 trillion, state and local governments hold $1.7 trillion, in addition to banks, insurance companies, pension funds, and more. In total, U.S. private investors hold approximately $24 trillion in U.S. Treasury bonds.

Now, here's the really interesting part. These pension funds and mutual funds are funded by 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, 55 years old, who has been teaching for 30 years. Every month, a portion of her salary goes into her retirement fund. That retirement fund needs to be invested somewhere safe, somewhere that can reliably generate returns so she can enjoy her retirement. What could be safer than borrowing from the U.S. government? So her retirement fund buys Treasury bonds. The teacher might also be worried about the Treasury debt. She hears on the news, sees those horrific numbers, and her concerns are understandable. But here's the twist: she's one of the lenders. Her retirement depends on the government continuing to borrow and pay the interest on these bonds. If the U.S. suddenly pays off all its debt tomorrow, her retirement fund will lose one of its safest and most reliable investments.

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

Now let's move on to 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 governments and private entities, collectively hold approximately $8.5 trillion in U.S. Treasury bonds, roughly 30% of the publicly held portion.

But what's interesting about foreign holdings is why other countries buy US Treasury bonds? Let's take Japan as an example. Japan is the world's third-largest economy. They export cars, electronics, and machinery to the US, and Americans buy these products in dollars, earning Japanese companies a lot of dollars. Now what happens? These companies need to convert their dollars into yen to pay their domestic employees and suppliers. But if they all try to convert to dollars at the same time, the yen will appreciate significantly, causing Japanese exports to become more expensive and less competitive.

So what will Japan do? The Bank of Japan will buy these dollars and invest them in US Treasury bonds. This is a way of recycling the trade surplus. Think of it this way: the US buys physical goods from Japan, such as Sony TVs and Toyota cars; Japan uses these dollars to buy US financial assets, namely US Treasury bonds. The funds are circulating, and the debt is simply the accounting record of this circulation.

This leads to a crucial point for much of the world: US government debt is not a burden imposed on unwilling creditors, but rather an asset they want to own . US Treasury bonds are considered the safest financial asset in the world. When uncertainty strikes, such as war, pandemics, or financial crises, funds flow into US Treasury bonds. This is known as "safe haven."

But I've been focusing on the US. What about the rest of the world? Because this is a global phenomenon. Global public debt currently stands at $111 trillion, representing 95% of global GDP. In just one year, debt increased by $8 trillion. Japan is perhaps the most extreme example. Japanese government debt is 230% of its GDP. If you were to compare Japan to a person, this would be like earning £50,000 a year but owing £115,000 in debt—already in the realm of bankruptcy. Yet, Japan continues to function. Interest rates on Japanese government bonds are near zero, sometimes even negative. Why? Because Japan's debt is almost entirely domestically held. Japanese banks, pension funds, insurance companies, and households hold 90% of Japan's government debt.

There is a psychological factor at play here. The Japanese are known for their high savings rate; they diligently save money. This savings are invested in government bonds, as they are considered the safest way to store wealth. The government then uses these borrowed funds for schools, hospitals, infrastructure, and pensions, benefiting the citizens who have saved, thus creating a closed loop.

Operating Mechanisms and Inequality: QE, Trillions of Dollars in Interest, and the Global Debt Crisis

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

Quantitative easing essentially means that central banks create money out of thin air by typing on keyboards, and then use this newly created money to buy government bonds . The Federal Reserve, the Bank of England, the European Central Bank, and the Bank of Japan don't need to raise funds elsewhere to lend to their governments; instead, they create money by increasing the numbers in their accounts. This money didn't exist before; now it's here. During the 2008-2009 financial crisis, the Federal Reserve created approximately $3.5 trillion in this way. During the COVID-19 pandemic, they created another massive amount of money.

Before you assume this is some kind of elaborate scam, let me explain why central banks do this and how they should operate. During crises such as financial crises or pandemics, economies stagnate. People stop spending out of fear, businesses stop investing because there's no demand, and banks stop lending for fear of default, creating a vicious cycle. Reduced spending means reduced income, which in turn leads to further reduced spending. At this point, the government needs to intervene, building hospitals, issuing stimulus checks, rescuing banks on the verge of collapse, and taking all necessary emergency measures. But the government also needs to borrow heavily for this. In abnormal times, there may not be enough people willing to lend at reasonable interest rates. So, the central bank intervenes by creating money and buying government bonds to maintain low interest rates, ensuring the government can borrow the funds it needs.

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

However, the reality is more complex. The first round of quantitative easing after the financial crisis appeared to work well, preventing a complete systemic collapse. But at the same time, asset prices soared, including stocks and real estate. This is because all the newly created money ultimately flowed into the hands of banks and financial institutions. They didn't necessarily lend the money to small businesses or homebuyers, but rather used it to buy stocks, bonds, and real estate. As a result, the wealthy who owned the majority of financial assets became even wealthier.

A Bank of England study estimates that quantitative easing boosted stock and bond prices by about 20%. However, behind this was an average increase of around £128,000 in wealth for the wealthiest 5% of British households, while households with virtually no financial assets benefited negligibly. This is a major irony of modern monetary policy: we create money to save the economy, but that 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, because it's not free; it accumulates interest. The U.S. is projected to pay $1 trillion in interest in fiscal year 2025. That's right, $1 trillion in interest alone—more than the country's entire military spending. It's the second-largest item in the federal budget after Social Security, and that figure is rising rapidly. Interest payments have nearly tripled in three years, from $497 billion in 2022 to $909 billion in 2024. By 2035, interest payments are projected to reach $1.8 trillion annually. Over the next decade, the U.S. government will pay $13.8 trillion in interest alone—money not used for schools, roads, healthcare, or defense, but solely for interest.

Consider what this means: every penny spent on interest payments is money that can't be used for anything else. It's not going towards building infrastructure, funding research, or helping the poor; it's just paying interest to bondholders. This is the current math: as debt increases, interest payments increase; as interest payments increase, the deficit increases; as the deficit increases, more borrowing is needed. It's a feedback loop. The Congressional Budget Office projects that by 2034, interest costs will consume about 4% of U.S. GDP and 22% of total federal revenue, meaning that more than one dollar out of every five dollars of tax revenue will go solely to interest payments.

But the United States is not the only country in this predicament. Within the OECD, the club of wealthy nations, interest payments currently average 3.3% of GDP—more than these governments spend on defense combined. Globally, over 3.4 billion people live in countries where government debt interest payments exceed their spending on education or healthcare. In some countries, governments pay bondholders more than they spend on educating children or treating the sick.

The situation is even more dire for developing countries. Poor nations have paid a record $96 billion in foreign debt. In 2023, their interest costs reached $34.6 billion, four times that of a decade earlier. Some countries spend as much as 38% of their export revenue on interest payments alone. This money, which could have been used to modernize their armed forces, build infrastructure, and educate their populations, has instead flowed to foreign creditors in the form of interest payments. Sixty-one developing countries currently spend 10% or more of their government revenue on interest payments, and many are struggling to make ends meet, with their spending on repaying existing debt exceeding their 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? 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 global credit markets, currency collapse, imported goods becoming unaffordable, and pensioners losing their savings. No government would choose to default unless it had no other option.

For major economies like the US, UK, Japan, and European powers, default is unthinkable. These countries borrow in their own currencies and can always print more money to repay. The problem isn't the ability to pay, but inflation—excessive money printing leading to currency devaluation is itself a disaster.

The four pillars that sustain the global debt system and the risk of collapse

This raises the question: what exactly keeps this system running?

The first reason is demographics and savings. Wealthy countries are experiencing aging populations and longer life expectancies, creating a need for safe havens to store retirement wealth. Government bonds perfectly meet this demand. As long as people need safe assets, there will be demand for government debt.

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

The third reason is monetary policy itself. Central banks use government bonds as a policy tool, buying bonds to inject funds into the economy and selling bonds to withdraw funds. Government debt acts as a lubricant for monetary policy; central banks need a large amount of government bonds to function properly.

The fourth reason is that safe assets are valuable in modern economies precisely because they are scarce. In a risky world, safety comes at a premium. Government bonds of stable nations provide this security. If governments were to actually repay all their debts, a shortage of safe assets would arise. Pension funds, insurance companies, and banks are all desperately seeking safe investment opportunities. Paradoxically, the world needs government debt .

However, one thing keeps me up at night, and it should concern us all: this system was stable before it collapsed. Historically, crises often erupt when confidence wanes; they occur when lenders suddenly decide to no longer trust borrowers . This happened in Greece in 2010. Similar scenarios occurred during the 1997 Asian financial crisis and in many Latin American countries in the 1980s. The pattern is always the same: everything seems normal for years, then suddenly it's triggered by an event or a loss of confidence, investors panic, demand higher interest rates, governments are unable to pay, and a crisis erupts.

Could this happen to a major economy? Could it happen in the US or Japan? Conventional wisdom suggests no, because these countries control their own currencies, have deep financial markets, and are "too big to fail" on a global scale. But conventional wisdom has been wrong before. In 2007, experts said national house prices wouldn't fall, but they did. In 2010, experts said the euro was indestructible, but it nearly collapsed. In 2019, no one predicted a global pandemic would bring the world economy to a standstill for two years.

Risks are accumulating. Global debt is at levels unprecedented in peacetime . After years of near-zero interest rates, rates have risen sharply, making debt servicing more expensive. Political polarization is intensifying in many countries, making it more difficult to formulate coherent fiscal policies. Climate change will require massive investments, which must be financed at already historically high debt levels. An aging population means a shrinking workforce to support the elderly, putting pressure on government budgets.

Finally, there is the issue of trust. The entire system relies on confidence that governments will fulfill their payment commitments, that currency will retain its value, and that inflation will remain moderate. If this confidence collapses, the entire system will crumble.

Who are the creditors? We are all creditors.

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 governments' central banks; and through the money created and circulated by trade surpluses to buy bonds, we collectively lend to ourselves. Debt is the claim of different parts of the global economy on other parts, a vast and interconnected network of obligations.

This system has brought tremendous prosperity, funding infrastructure, research, education, and healthcare; it has enabled governments to respond to crises without being constrained by tax revenue; and it has created financial assets that support retirement and provide stability. But it is also extremely volatile, especially as debt levels have climbed to unprecedented heights. We are navigating uncharted territory, where governments have never borrowed so heavily in peacetime, and interest payments have never consumed such a large proportion of the budget.

The problem isn't whether this system can continue indefinitely—it can't, nothing in history lasts indefinitely. The problem is how it will adjust . Will the adjustment be gradual? Will the government slowly control the deficit, and will economic growth outpace debt accumulation? Or will it erupt suddenly in the form of a crisis, forcing all the painful changes to happen simultaneously?

I don't have a crystal ball, and nobody does. But I can tell you this: the longer time goes on, the narrower the path between these two possibilities becomes, and the margin of error shrinks. We've built a global debt system where everyone owes everyone else, central banks create money to buy government bonds, and today's spending is paid for by tomorrow's taxpayers. In such a system, the rich reap disproportionate benefits from policies designed to help everyone, while poor countries pay heavy interest to creditors in rich countries. This can't go on forever; we'll have to make trade-offs. 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 indebted, the question of "who is lending" isn't really a question at all; it's a mirror. When we ask who the lenders are, we're actually asking: Who's involved? What's the direction this system is heading? Where will it lead us? And the unsettling truth is, nobody really controls the situation. The system has its own logic and dynamics. We've built something complex, powerful, and fragile, and we're all struggling to navigate it.

Original link