Former Greek Finance Minister: It's "All of Us."

Written by: Zhang Yaqi

Source: Wall Street Watch

Currently, every major country on Earth is mired in debt, raising the century-old question: "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 risks of collapse.

Yanis Varoufakis stated that the lenders of government debt are far from outsiders; they are part of a closed-loop system within the country. Taking the United States as an example, the largest creditors of the government are the Federal Reserve and internal government 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 currency stability. Therefore, in wealthy countries, government bonds are actually the safest assets that creditors compete to hold.

Yanis Varoufakis warned that the system will fall into crisis when confidence collapses, and there are historical precedents for this. Although traditional views hold that major economies will not default, the accumulation of risks such as high global debt, a high-interest-rate environment, political polarization, and climate change may lead to a loss of confidence in the system, triggering 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 reaching unprecedented heights.

The issue is not whether it can continue indefinitely, but whether the adjustment will be gradual or suddenly erupt in crisis. He warned that the margin for error is narrowing; although no one can predict the future, structural issues such as the disproportionate benefits to the wealthy and high-interest payments by poorer countries cannot last forever, and no one truly controls this complex system that has its own logic.

Here are the highlights from the podcast:

• In wealthy countries, citizens are both borrowers (benefiting from government spending) and lenders, as 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 hold.

• The U.S. is expected to pay $1 trillion in interest in the 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.

• Historically, crises often erupt when confidence dissipates; a crisis occurs when lenders suddenly decide not to trust borrowers anymore.

• 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 recycled for purchasing bonds via trade surpluses, we collectively lend to ourselves.

• The issue is not whether this system can continue indefinitely—it cannot; nothing in history lasts indefinitely. The question is how it will adjust.

Here is the transcript of the podcast:

Global Debt Crisis: The "Mysterious" Lenders Are Ourselves

Yanis Varoufakis:

I want to talk to you about something that sounds like a riddle or magic. Every major country on Earth is mired in debt. The U.S. is $38 trillion in debt, Japan's debt is equivalent to 230% of its entire economy. The UK, France, Germany—all are deep in deficits. Yet for some reason, the world keeps turning, money keeps flowing, and markets keep functioning.

This is the riddle that keeps people awake at night: If everyone is in debt, then who is lending? Where does all this money come from? When you borrow money from a bank, the bank has that money; this is a perfectly reasonable question. It comes from somewhere, including depositors, investors, bank capital, funding pools, and borrowers. It's simple. 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 what is actually happening, 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 is the easiest case to examine. As of October 2, 2025, the U.S. federal debt 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 you 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: 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 bonds. Think about it for a moment: the U.S. government owes money to the U.S. government bank. But this is just the beginning.

Another $7 trillion exists in what we call "intra-governmental 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. Thus, the government borrows from the Social Security Fund to finance other projects, promising to pay it back later. It's like taking money from your left pocket to pay off debt in your right pocket. So far, the U.S. actually owes itself about $13 trillion, which is already more than a third of the total debt.

The question of "who is the lender" becomes strange, doesn't it? But let's continue. The next important category is private domestic investors, which includes ordinary Americans participating through various channels. Mutual funds hold about $3.7 trillion, state and local governments own $1.7 trillion, and there are also banks, insurance companies, pension funds, etc. U.S. private investors collectively hold about $24 trillion in U.S. Treasury bonds.

Now, this is where it gets really interesting. 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, 55 years old, who has been teaching for 30 years. Each month, a portion of her salary goes into her pension fund. That pension fund needs to invest the money in a safe place, somewhere that can reliably provide returns so she can enjoy her retirement. What could be safer than lending to the U.S. government? So her pension fund buys Treasury bonds. That teacher might also be worried about the debt situation. She hears the news, sees those scary numbers, and feels justified in her concern. 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 paid off all its debt tomorrow, her pension 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 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 governments and private entities, collectively hold about $8.5 trillion in U.S. Treasury bonds, 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 lot of dollars. What happens next? These companies need to convert dollars into yen to pay their domestic employees and suppliers. But if they all try to convert dollars to yen at the same time, the yen will appreciate significantly, making Japanese exports more expensive and less competitive.

So what does Japan do? The Bank of Japan buys these dollars and invests them in U.S. Treasury bonds. This is a way to recycle trade surpluses. Think of it this way: the U.S. buys physical goods from Japan, like Sony TVs and Toyota cars; Japan then uses those dollars to purchase U.S. financial assets, namely U.S. Treasury bonds. The money circulates, and debt is merely an accounting record of this circulation.

This leads to a crucial point for much of the world: U.S. government debt is not a burden imposed on unwilling creditors, but rather 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, money flows into U.S. Treasury bonds. This is known as "safe haven."

But I have been focusing on the U.S. What about the rest of the world? Because this is a global phenomenon. Global public debt currently stands at $111 trillion, accounting for 95% of global GDP. In just one year, debt grew 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 £115,000, which is already in the realm of bankruptcy. Yet Japan continues to function. The interest rates on Japanese government bonds are close to zero, 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 is a psychological factor at play here. The Japanese are known for their high savings rate, and they diligently save money. These savings are used to invest in government bonds because 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, creating a closed loop.

Mechanisms of Operation and Inequality: QE, Trillions in Interest, and the Global Debt Dilemma

Now let's explore the mechanisms of operation: Quantitative Easing (QE).

The practical meaning of Quantitative Easing is: central banks create money out of thin air by pressing keys on a keyboard in digital form, 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; they create money by increasing the numbers in their accounts. This money did not exist before; now it does. During the financial crisis of 2008 and 2009, the Federal Reserve created about $3.5 trillion in this way. During the COVID-19 pandemic, they created another massive amount of funds.

Before you think this is some kind of elaborate scam, let me explain why central banks do this and how it is supposed to work. During crises such as financial downturns or pandemics, the economy can come to a standstill. People stop consuming out of fear, businesses halt investments due to lack of demand, and banks cease lending due to concerns over defaults, creating a vicious cycle. Reduced spending means lower income, and lower income leads to further reductions in spending. At this point, the government needs to intervene, building hospitals, issuing economic stimulus checks, and rescuing failing banks, taking all necessary emergency measures. However, the government also needs to borrow heavily to do this. In abnormal times, there may not be enough willing lenders at reasonable interest rates. Thus, the central bank intervenes by creating money and purchasing government bonds to maintain low interest rates, ensuring the government can borrow the necessary funds.

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

However, reality is more complex. The first round of quantitative easing after the financial crisis seemed effective, 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 banks and financial institutions. They do not necessarily lend the money to small businesses or homebuyers but use it to purchase stocks, bonds, and properties. As a result, the wealthy, who own most financial assets, became even richer.

Research from the Bank of England estimates that quantitative easing raised stock and bond prices by about 20%. However, behind this, the average wealth of the richest 5% of households in the UK increased by about £128,000, while households with almost no financial assets 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; it accumulates interest. The U.S. is expected to pay $1 trillion in interest in the fiscal year 2025. Yes, just the interest payments will reach $1 trillion, which is more than the entire military spending of the country. It is the second-largest item in the federal budget, after Social Security, and this figure is rising rapidly. Interest payments have nearly doubled in three years, from $497 billion in 2022 to $909 billion in 2024. By 2035, interest payments are expected to reach $1.8 trillion annually. Over the next decade, the U.S. government will spend $13.8 trillion just on interest payments—money that is not used for schools, roads, healthcare, or defense, but merely to pay interest.

Think about what this means: every dollar spent on interest is a dollar that cannot be used elsewhere. It is not used for building infrastructure, funding research, or helping the poor; it is simply paying interest to bondholders. This is the current mathematical situation: as debt increases, interest payments also rise; as interest payments increase, the deficit grows; and as the deficit increases, more borrowing is needed. This is a feedback loop. The Congressional Budget Office estimates that by 2034, interest costs will consume about 4% of U.S. GDP and account for 22% of total federal revenue, meaning that more than one dollar out of every five in tax revenue will be purely for interest payments.

But the U.S. is not the only country in this predicament. Within the wealthy countries club, the OECD, interest payments currently average 3.3% of GDP, which is more than these governments spend on defense. More than 3.4 billion people live in countries where government debt interest payments exceed spending on education or healthcare. In some countries, the money the government pays to bondholders is greater than what it spends on educating children or treating patients.

For developing countries, the situation is even more severe. Poor countries 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 military, build infrastructure, or educate their populations, but instead, it flows to foreign creditors in the form of interest payments. Sixty-one developing countries currently allocate 10% or more of government revenue to pay interest, with many countries trapped in a situation where their spending to repay existing debt exceeds 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 pay 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, imports becoming unaffordable, and pensioners losing their savings. No government chooses to default unless there are no other options.

For major economies like the U.S., the UK, Japan, and European powers, default is unthinkable. These countries borrow in their own currencies and can always print more money to repay. The issue is not one of ability to pay, but of inflation—printing too much money 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 the question: what exactly is keeping this system running?

The first reason is demographics and savings. Wealthy countries are experiencing an aging population, with people living longer and needing a safe place to store retirement wealth. Government bonds fit this need perfectly. 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 with massive trade imbalances. Some countries have large trade surpluses, exporting far more than they import; others run huge deficits. Countries with surpluses often accumulate financial claims against deficit countries in the form of government bonds. As long as these imbalances persist, debt will continue to exist.

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 pull funds back. Government debt acts as a lubricant for monetary policy, and central banks need a large amount of government bonds to operate normally.

The fourth reason is that in modern economies, safe assets are valuable precisely because they are scarce. In a world full of risks, safety comes at a premium. Government bonds from stable countries provide this safety. If a government were to pay off all its debt, it would create a shortage of safe assets. Pension funds, insurance companies, and banks are all desperately seeking safe investment channels. Paradoxically, the world needs government debt.

However, one thing keeps me awake at night and should concern all of us: this system has remained stable until now. Historically, crises often erupt when confidence dissipates; a crisis occurs when lenders suddenly decide not to trust borrowers anymore. This happened in Greece in 2010. Similar situations 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 triggered by an event or loss of confidence, investors panic, demand higher interest rates, and the government is unable to pay, leading to a crisis.

Could this happen to a major economy? Could it happen in the U.S. 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. But traditional views have been wrong before. In 2007, experts claimed that national housing prices would not fall, but they did. In 2010, experts said the euro was unbreakable, yet it nearly collapsed. In 2019, no one predicted that a global pandemic would halt the world economy for two years.

Risks are accumulating. Global debt is at unprecedented levels for peacetime. After years of near-zero interest rates, rates have risen sharply, increasing the cost of servicing debt. Political polarization in many countries is intensifying, making it harder to formulate coherent fiscal policies. Climate change will require massive investments, and these investments must be funded at already historically high levels of debt. 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 in the following points: that governments will meet their payment commitments, that currencies will maintain their value, and that inflation will remain moderate. If this confidence collapses, the entire system will unravel.

Who is the Creditor? We All Are

Returning to our initial question: 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 recycled via trade surpluses to purchase bonds, we collectively lend to ourselves. Debt is the financial claim of different parts of the global economy against each other, forming a vast and interconnected web of obligations.

This system has brought tremendous prosperity, funding infrastructure, research, education, and healthcare; it has allowed governments to respond to crises without being constrained by tax revenues; 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; in peacetime, governments have never borrowed as heavily as they do now, and interest payments have never consumed such a large proportion of budgets.

The question is not whether this system can continue indefinitely—it cannot; nothing in history lasts indefinitely. The question is how it will adjust. Will the adjustment be gradual? Will governments slowly bring deficits under control while economic growth outpaces debt accumulation? Or will it erupt suddenly in the form of a crisis, forcing all painful changes to happen at once?

I don’t have a crystal ball; no one does. But I can tell you: the longer this goes on, the narrower the path between these two possibilities becomes, and the margin for error is shrinking. We have built a global debt system in which everyone owes someone else, central banks create money to buy government bonds, and today’s spending is paid for by tomorrow’s taxpayers. In such a place, the wealthy disproportionately benefit from policies intended to help everyone, while poor countries pay heavy interest to the creditors of wealthy nations. This cannot last forever; we must 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 in debt, the riddle of "who is lending" is not really a riddle at all; it is a mirror. When we ask who the lenders are, we are really asking: who is involved? What is the direction of this system? Where will it take us? And the unsettling truth is that, in reality, no one is truly in control. This system has its own logic and dynamics. We have created something complex, powerful, and fragile, and we are all struggling to navigate it.

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