World Government Debt

World Government Debt

The World’s Biggest IOU

Who does the world owe all this money to — why did we borrow it, where did it go, and what happens when the promises become bigger than the economy that has to honour them?

A note before you begin: This is a deep-dive guide of roughly 10,000 words exploring how government debt works, why it exists, who governments borrow from, and what happens when promises made today become claims on tomorrow.

It covers:

• What government debt actually is — and why one government’s liability becomes someone else’s financial asset
• Why governments borrow — deficits, infrastructure, crises, wars and the difference between productive and unproductive borrowing
• How government bonds work — who buys them, who receives the interest and where the money ultimately flows
• Who the world owes money to — banks, pension funds, insurance companies, investment funds, central banks, foreign governments and individuals
• How debt grows — deficits, refinancing, interest costs and the debt cycle
• Debt vs GDP — why the size of the economy matters more than looking at the debt number in isolation
• Economic growth and productivity — whether future economic growth can actually support today’s promises
• The United States — its enormous debt, deficits, borrowing requirements and rising interest costs
• The United Kingdom — government debt, debt-interest costs and foreign ownership of UK government bonds
• Global government debt — Japan, France, Italy, Germany, India, China and the very different debt structures across countries
• Inflation and government debt — how inflation changes the real burden of fixed debt
• Debt and money creation — the difference between government borrowing and central-bank money creation, and how the two systems interact
• The Federal Reserve and interest rates — why monetary policy matters for government borrowing, businesses, mortgages and the wider economy
• What happens when debt becomes too large — growth, taxation, spending cuts, inflation, restructuring, default and financial repression
• The global financial system as a network of promises — how government bonds, stocks, mortgages, pensions and corporate debt all represent claims on the future
• The US dollar and global reserves — why the dollar remains dominant and what is changing underneath the reserve system
• Gold and central-bank reserves — why countries such as China and India hold gold and why central banks have been increasing their interest in it
• Gold vs fiat money — what makes gold different from currencies and government bonds
• Dollar diversification — why reducing the dollar’s share of reserves does not necessarily mean abandoning the dollar
• Debt, gold, interest rates and inflation — how these seemingly separate stories are actually connected
• What government debt means for your money — property, stocks, bonds, gold, mortgages, businesses and investments
• How to analyse a country’s debt — the questions that matter beyond simply asking, “How much debt does it have?”
• The future of the debt system — whether productivity and economic growth can keep up with the promises already made
• The bigger question — what happens when the claims on the future become larger than the future economy can comfortably support?

You don’t have to read it all in one sitting.

If you’re looking for a particular subject, use Ctrl + F on Windows or Command + F on Mac and search for the relevant topic or heading.

Think of this as a guide you can return to, rather than an article you have to read from beginning to end.

 

You hear it everywhere.

America has trillions of dollars of debt.

Japan’s government debt is more than twice the size of its economy.

Europe has enormous debt.

India has debt.

China has debt.

Almost every major economy in the world has debt.

And then comes the question that most people have probably thought about at some point:

If almost every country owes money…

Who exactly is everyone borrowing from?

And perhaps an even bigger question:

How did we build a world where debt has become such a fundamental part of the economy?

Because when you hear “government debt”, it can sound like a very complicated financial concept.

It isn’t.

At its simplest, it is a promise.

The government needs money today.

Someone provides that money.

And the government promises to pay it back in the future, usually with interest.

That sounds simple.

But when you scale that relationship from one person to a government, from one government to hundreds of countries, and from one loan to trillions of dollars of bonds, something much bigger appears.

You start seeing the machine underneath the economy.

And that machine is built around one thing:

Promises about the future.

The IMF estimated global public debt at around 93.9% of global GDP in 2025 and projected it could reach around 100% of global GDP by 2029. At the same time, the IMF has warned about rising interest burdens and shrinking fiscal room for governments.

So let’s forget the complicated terminology for a moment.

Let’s understand what is actually happening.

Start with something you already understand

Imagine you earn:

₹10 lakh a year.

But you spend:

₹12 lakh.

You have a problem.

Your income is ₹10 lakh.

Your spending is ₹12 lakh.

You are short by:

₹2 lakh.

That’s your deficit.

You have two basic choices.

You can reduce your spending.

Or you can borrow the ₹2 lakh.

Suppose you borrow it.

Now you have:

₹10 lakh income

₹12 lakh spending

₹2 lakh borrowing

But next year, something has changed.

You still have your normal expenses.

And now you also have the responsibility of servicing that ₹2 lakh debt.

If you keep spending more than you earn, you may borrow again.

And again.

And again.

That’s the basic idea behind government deficits and borrowing too.

The difference is that a government isn’t a household.

A government has taxation.

It has an economy generating income.

It can issue debt at enormous scale.

And, depending on the country and currency, it has different degrees of monetary sovereignty.

It can also refinance existing debt rather than necessarily paying the entire principal back at once.

So comparing a government directly with a household can be misleading.

But the underlying concept is still useful:

When spending is greater than revenue, somebody has to finance the difference.

And very often, that somebody is the bond market.

The first thing to understand: government debt is somebody else’s asset

This is one of the most important things to understand.

When the US government, for example, borrows money, it doesn’t simply take the money and make it disappear.

It issues a financial asset.

The government effectively says:

Give me money today, and I promise to make payments to you according to the terms of this bond.

The government receives money.

The investor receives a bond.

So:

Government → borrowing

Investor → bond

The government’s liability becomes someone else’s financial asset.

And who are these investors?

Not just billionaires.

They can include:

• Banks
• Pension funds
• Insurance companies
• Mutual funds
• Investment funds
• Central banks
• Foreign governments
• Companies
• Individual investors

So when we say:

“The government owes money.”

We should immediately ask:

“To whom?”

Because that debt is also somebody else’s asset.

This is why government debt isn’t simply “money lost”.

It is a transfer of money and a creation of a claim on future government payments.

And suddenly the picture becomes much more interesting.

One person’s liability becomes another person’s investment

Think about a pension fund.

A pension fund has future obligations to pensioners.

It therefore needs assets that can provide returns and, in many cases, relatively predictable cash flows.

A government bond can serve that purpose.

The government borrows.

The pension fund receives the bond.

The government promises future payments.

The pension fund now owns a financial asset.

The same transaction looks completely different depending on which side of the balance sheet you stand on.

For the government:

Debt.

For the investor:

Asset.

This is why debt is so deeply embedded in modern finance.

The system isn’t simply made of money.

It is made of claims.

Claims on future income.

Claims on future profits.

Claims on future taxes.

Claims on future economic activity.

And this leads us to an important idea:

Debt is not money disappearing. Debt is a promise being created.

Why borrow in the first place?

This is where we need to separate useful borrowing from permanent dependence on borrowing.

Imagine a country wants to build:

• Roads
• Ports
• Electricity infrastructure
• Hospitals
• Schools
• Defence infrastructure

But the government currently collects only ₹100 billion in taxes.

The entire infrastructure programme costs ₹150 billion.

The country has a choice.

It could wait years, collect taxes and slowly build everything.

Or it could borrow ₹50 billion today, build the infrastructure and repay the debt over the next 20 or 30 years.

That isn’t necessarily irresponsible.

In fact, it can make perfect economic sense.

Because the road might increase economic activity.

Businesses can use it.

People can travel.

Goods can move faster.

Companies can produce more.

Workers can earn more.

The economy can become more productive.

Tax revenue can eventually increase.

So:

Borrow

↓

Build productive infrastructure

↓

Increase economic capacity

↓

Generate future income

↓

Repay debt

This is a very different model from simply borrowing money to maintain an existing level of consumption.

The problem isn’t necessarily debt.

The question is what the debt produces.

Debt is a bridge between today and tomorrow

This is the deeper mechanism.

A road takes years to build.

An airport takes years.

A power plant takes years.

A factory takes years.

A technology platform may take years before it becomes profitable.

If governments waited until they had collected every rupee of tax required before beginning every major project, many investments would happen much later.

Borrowing allows the government to bring some of that future economic capacity into the present.

The same thing happens with individuals.

You take a mortgage today.

You buy the house today.

Your future income pays for it over many years.

A company borrows today.

It buys machinery today.

Future profits are expected to repay the debt.

Debt therefore allows us to pull some of tomorrow’s economic capacity into today.

And that can be incredibly powerful.

But there is a condition.

The bridge has to connect somewhere.

The future has to produce enough to support the promise.

When borrowing becomes permanent

Let’s make the example extremely simple.

A government collects:

₹100

But spends:

₹110

So it borrows:

₹10

Next year, revenue rises to:

₹103

But spending rises to:

₹115

Now it borrows:

₹12

Next year:

Revenue:

₹106

Spending:

₹121

Borrowing:

₹15

Eventually you reach something like:

₹106 revenue

versus

₹130 spending.

At this point, something has changed.

The government isn’t primarily borrowing to build something new that will increase future economic output.

It is borrowing to maintain the existing system.

And that is a completely different situation.

Because now the system starts becoming dependent on tomorrow’s income to support today’s promises.

Two very different debt models

MODEL 1 — PRODUCTIVE BORROWING

Borrow

↓

Build productive asset

↓

Increase productivity

↓

Increase economic activity

↓

Generate future income

↓

Repay debt

MODEL 2 — STRUCTURAL BORROWING

Borrow

↓

Consume

↓

Deficit

↓

Refinance

↓

Borrow again

↓

Pay interest

↓

Borrow again

The existence of debt is not what separates these two models.

What the debt produces does.

Why government debt has grown so dramatically

There isn’t one single reason.

It is a combination of many things.

Governments have promised more.

Pensions.

Healthcare.

Social security.

Subsidies.

Defence.

Infrastructure.

Public services.

Many developed countries are also dealing with ageing populations, which can put additional pressure on pension and healthcare systems.

Then there are crises.

Wars.

Financial crises.

Recessions.

Energy shocks.

COVID.

When an economy is collapsing, governments often borrow heavily because allowing the economy to collapse completely can be even more damaging.

That borrowing can be justified during a crisis.

But here’s the difficult part.

Temporary borrowing can become permanent borrowing.

A government can borrow during a crisis.

Then the crisis ends.

But the spending commitments don’t necessarily disappear.

And then another crisis comes.

Then another.

And debt remains.

Borrowing can also be politically easier than taxation

This is one of the most interesting parts of the system.

Imagine a politician says:

“I will give you ₹1,000 more in benefits, but I will also increase your taxes by ₹1,000.”

Most people are not going to celebrate.

The benefit is visible.

The tax increase is visible too.

Now imagine the politician says:

“I will give you ₹1,000 more.”

And the government borrows the money.

The benefit is visible today.

The cost is distributed into the future.

The person receiving the benefit may not immediately feel the cost.

But somebody in the future will have to deal with the debt.

This creates a powerful structural incentive:

The benefit is immediate. The cost can be delayed.

It doesn’t mean every government is deliberately acting irresponsibly.

It means there is a structural political incentive for governments to provide visible benefits today while distributing some of the cost into the future.

That is one reason debt can continue growing even when everyone knows that debt cannot rise forever.

The most important mechanism: interest

Now we reach the part that makes large debt stocks so important.

Suppose you have:

₹100 of debt

at:

5% interest.

Your interest is:

₹5.

If you don’t have enough income to pay that interest and you borrow again, your debt can start compounding.

₹100 becomes:

₹105

Then 5% of ₹105 is:

₹5.25

So:

₹105 → ₹110.25

Then:

₹110.25 → ₹115.76

And so on.

Real sovereign debt does not work this mechanically.

Governments have tax revenue.

Different bonds mature at different times.

Interest rates change.

Inflation changes the real value of debt.

Governments refinance.

Economic growth changes the size of the economy.

So this is only an illustration.

But the underlying principle is extremely important:

When the debt stock becomes enormous, even a normal interest rate can create an enormous interest bill.

And this is increasingly important globally.

The IMF has estimated that global public debt reached around 93.9% of global GDP in 2025 and projected it could reach around 100% by 2029. It has also highlighted the increase in global interest expenditures.

So the question isn’t just:

“How much debt do we have?”

It is also:

“How much does it cost to carry that debt?”

Debt versus economic growth

For years, one of the simplest answers to rising debt has been:

“Don’t worry. The economy will grow.”

But that isn’t automatically true.

Economic growth can help.

But debt can grow too.

So there is a race happening.

On one side:

Productivity → wages → profits → GDP → tax revenue

And on the other:

Borrowing → interest → refinancing → more borrowing

If economic growth and government revenue grow faster than the effective debt burden, debt can become more manageable relative to the economy.

But if:

Debt growth + interest burden > economic growth

the system becomes increasingly fragile.

This is not simply a theoretical question.

The Congressional Budget Office projections cited in the source material show US federal debt held by the public rising from roughly 101% of GDP in 2026 to 120% in 2036, with continuing deficits and rising interest costs contributing to the increase.

The CBO has also warned that high and rising debt can reduce investment, slow economic growth and increase borrowing costs.

So:

Debt doesn’t magically create productivity.

Where does real economic growth actually come from?

This is where the conversation should move away from financial numbers and back into the real world.

Real economic growth comes from things like:

More workers.

Better education.

More capital.

Technology.

Better infrastructure.

Innovation.

Better organisation.

More productive use of resources.

Think about AI.

If AI allows one person to produce what previously required five people, productivity can increase.

You are producing more with the same amount of human labour.

That is real economic improvement.

But there is an important distinction:

You cannot assume technology will automatically grow fast enough to outrun debt.

That’s a possibility.

It’s not a law.

You are effectively making a bet that future productivity, economic activity and tax revenues will be large enough to support today’s promises.

And that is where the debt discussion becomes much deeper.

The number isn’t the whole story

Imagine a country with:

₹100 trillion economy

and:

₹20 trillion debt.

The economy is much larger than the debt.

Now imagine:

₹100 trillion economy

and:

₹100 trillion debt.

The relationship is completely different.

Now:

₹100 trillion economy

and:

₹200 trillion debt.

The pressure becomes much more obvious.

But even here, the absolute number doesn’t tell the entire story.

You have to ask:

What interest rate is the government paying?

Who owns the debt?

What currency is the debt denominated in?

How much tax revenue does the government generate?

How fast is the economy growing?

How productive is the economy?

How much of the debt is short-term and needs refinancing soon?

What assets does the government or broader economy have?

And most importantly:

How much income does the economy generate relative to the promises it has made?

That is why economists look at debt-to-GDP.

GDP is essentially the size of the economic activity being produced.

So debt-to-GDP gives you a rough way of asking:

How large are the promises compared with the economic engine that has to support them?

There is no single “world debt problem”

This is another important distinction.

Different countries can have very different debt structures.

Japan can have extremely high government debt relative to GDP while having a very different financing structure from another country.

The United States has enormous debt, but it also issues the world’s dominant reserve currency and has deep financial markets.

China’s public-sector debt picture is complicated by the broader liabilities of local governments and other public entities.

India has a significant government debt burden, but its economic growth trajectory and demographic structure are also important parts of the picture.

The UK, France, Germany and Italy all have different combinations of debt, deficits, growth, interest costs and fiscal constraints.

For example, IMF projections cited in the source material put 2025 gross government debt at approximately:

So there isn’t one single formula called:

“The World Debt Problem.”

There are different systems.

Different currencies.

Different creditors.

Different interest rates.

Different growth rates.

Different political systems.

Different demographics.

Different amounts of debt held domestically versus internationally.

And that matters enormously.

The United States: the clearest case study

The United States sits at the centre of the global financial system, and its debt gives us a useful case study.

The US government ran a federal budget deficit of approximately $1.775 trillion in fiscal year 2025, according to the Treasury’s financial reporting.

And in August 2026, the Treasury projected another $739 billion of privately held net marketable borrowing for July–September 2026, followed by another $628 billion for October–December.

Now look at the cycle.

The government spends.

↓

It collects taxes.

↓

If spending is greater than revenue, there is a deficit.

↓

The government borrows.

↓

It issues bonds.

↓

Investors buy those bonds.

↓

The government now has future obligations.

↓

Interest has to be paid.

↓

Existing debt eventually has to be refinanced or repaid.

↓

And if the government continues running deficits…

More debt is issued.

That’s the machine.

What happens when the machine gets bigger?

The United States has an extraordinary financial advantage.

It issues the world’s dominant reserve currency.

There is enormous global demand for US financial assets.

Treasuries are deeply embedded in global markets.

The US has enormous economic and financial capacity.

But even the US isn’t immune to the mathematics of debt.

The Congressional Budget Office projects US federal net interest costs at around $1.0 trillion in 2026, rising to approximately $2.1 trillion by 2036 under its baseline projections.

That means the government will increasingly be spending enormous amounts simply on the cost of carrying its existing debt.

And remember:

Interest doesn’t build a road.

Interest doesn’t build a hospital.

Interest doesn’t educate a child.

Interest is the cost of the promises already made.

The more money that has to go toward servicing yesterday’s borrowing, the less flexibility exists for tomorrow.

That is the part that should make people pay attention.

The United Kingdom: the same mechanism in a different environment

The United Kingdom doesn’t have the dollar’s unique reserve-currency position.

But it is dealing with its own large debt burden.

By August 2026, UK public-sector net debt was approximately £2.99 trillion, equivalent to around 93.8% of GDP.

The UK’s Office for Budget Responsibility projected debt-interest spending at approximately £109.7 billion in 2025–26, rising to around £137.1 billion by 2030–31.

It also noted that debt-interest spending is now around twice as high as its average share of GDP during the decade before the pandemic.

And the UK has another interesting characteristic.

A substantial portion of UK government debt is held by investors outside the UK.

The ONS reported that around one-third of UK gilts are held overseas.

So when the UK government pays interest on those bonds, some of that income ultimately flows to investors outside the country.

Again, nothing is inherently wrong with this.

Foreign investors buying your government bonds can be a sign of confidence and can help finance the government.

But it demonstrates the basic principle:

Government debt creates claims on future public finances.

Debt creates constraints

Debt doesn’t require some secret room where everyone sits together and decides how to control the world.

The mechanism is much simpler.

If a government becomes heavily indebted, it becomes sensitive to:

• Interest rates
• Bond-market confidence
• Inflation
• Currency stability
• Tax revenue
• Economic growth
• Refinancing conditions
• Investor demand

That creates constraints.

A government may want to spend more.

But if interest costs are already enormous, additional borrowing becomes more expensive.

A government may want to cut taxes.

But if deficits are already large, that can create another financing problem.

A government may want to respond aggressively to another crisis.

But if debt is already very high, its fiscal room can be smaller.

This is what debt does.

It creates incentives and constraints.

The CBO has similarly warned that growing US federal debt can reduce policymakers’ flexibility in responding to future crises and increase vulnerability to higher interest rates.

You don’t need a conspiracy to explain that.

The structure itself creates the behaviour.

The US–Fed relationship

The debt problem also creates tension around interest rates.

This is where the relationship between government borrowing and monetary policy becomes important.

The Federal Reserve sets monetary policy with the objective of managing inflation and employment.

The government, meanwhile, has to finance its enormous debt.

These are related systems — but they are not supposed to be the same decision.

And that creates tension.

When interest rates are high:

Borrowing becomes more expensive.

↓

Businesses face higher financing costs.

↓

Consumers face higher borrowing costs.

↓

Mortgages become more expensive.

↓

Government refinancing becomes more expensive.

↓

Debt-interest costs rise.

But if rates are kept too low while inflation remains persistent:

Borrowing stays cheaper.

↓

Demand can remain stronger.

↓

Inflation can remain elevated.

↓

The real purchasing power of money can fall.

This is the difficult balance the Federal Reserve has to manage.

The source material describes the political tensions around Federal Reserve leadership in 2026, including pressure from President Donald Trump and questions around central-bank independence.

But the deeper issue is bigger than one president.

If governments need cheap borrowing, lower interest rates help.

If inflation is too high, lower interest rates can make the problem harder.

That tension is built into the system

.

Inflation changes the equation

Now we enter another part of the system that is often misunderstood.

Imagine I owe you:

₹100

and promise to repay you next year.

But imagine that over the next year, the purchasing power of money falls significantly.

I still give you:

₹100.

Technically, I repaid the exact amount I promised.

But the ₹100 you receive may buy less than the ₹100 you originally lent me.

This is why inflation matters when thinking about debt.

Inflation can reduce the real burden of fixed nominal debt.

But that doesn’t mean governments simply want inflation.

High and uncontrolled inflation can destroy purchasing power, undermine confidence and eventually increase borrowing costs.

So inflation is not simply:

“Prices went up.”

It is part of a much larger relationship between:

Debt + money + purchasing power + interest rates.

Debt and money are connected

Think about what happens when governments borrow.

The government issues bonds.

Investors buy those bonds.

Banks and financial institutions hold them.

Central banks operate in the same financial system.

Interest is paid.

Existing debt matures.

New debt is issued.

The financial system continuously rolls obligations forward.

This doesn’t mean every new dollar of government debt is literally “printed money.”

It isn’t.

Government borrowing and central-bank money creation are different mechanisms.

But they interact.

And when people look at enormous government debt, repeated deficits, rising interest costs and the possibility of continued monetary expansion, some investors naturally start asking:

“What assets can preserve purchasing power if the value of fiat money falls?”

For some people, the answer is property.

For others, equities.

For others, productive businesses.

And for others:

Gold.

What is “real money”?

Modern currencies are fiat money.

That means the currency isn’t normally redeemable for a fixed quantity of gold or another physical commodity.

A £1 note isn’t a claim that you can take to the Bank of England and exchange for a specific amount of gold.

A $1 bill isn’t a claim to a fixed amount of gold held somewhere by the US government.

The value comes from the monetary system, the economy, institutions, legal framework, taxation system, financial markets and — perhaps most importantly — people’s continued willingness to use and accept the currency.

And that system has enormous advantages.

Fiat money allows central banks to respond to economic crises.

It gives governments and central banks flexibility.

It allows the money supply to expand or contract according to economic conditions.

It makes modern banking and credit systems possible at enormous scale.

But it also creates something very important:

Money can be created in quantities that are not physically limited in the way gold is.

And that is where some investors start thinking differently.

Gold cannot simply be created by pressing a button.

There is a finite amount of gold that can be mined economically.

Fiat money can expand.

That doesn’t mean:

“Money printing automatically destroys the currency.”

That would be far too simplistic.

Money creation can be necessary.

During a financial crisis, for example, expanding liquidity can prevent a much larger economic collapse.

But if money and credit expand persistently faster than the economy’s productive capacity, inflationary pressure can eventually emerge.

And this brings us back to the debt problem.

So why does gold matter?

Gold has one characteristic that a government bond or a fiat currency doesn’t have:

It is not somebody else’s promise to pay.

If you hold a US Treasury bond, you hold an asset backed by a US government obligation.

If you hold a dollar, you hold a fiat currency whose value depends on the monetary and economic system behind it.

If you hold gold in a vault, you simply own the gold.

It doesn’t need a government to promise you anything.

That doesn’t make gold automatically superior to currencies or bonds.

Gold doesn’t pay interest, it can be volatile, and storing and trading it has costs.

But it gives central banks something different:

A reserve asset without another country’s balance sheet sitting behind it.

And this is one reason the gold story has become increasingly important.

China and India show two different sides of this story

China has been steadily increasing its official gold holdings.

The People’s Bank of China added gold for 18 consecutive months through April 2026, taking its reported holdings to around 2,322 tonnes, roughly 9% of its total reserves at that point.

By the end of 2025, China’s reported gold holdings were around 2,306 tonnes, after adding approximately 27 tonnes during the year.

And China isn’t alone.

The World Gold Council’s 2026 survey found that central banks had accumulated an average of around 1,000 tonnes of gold per year over the preceding four years, roughly double the average pace of the previous decade.

India is a little different.

The Reserve Bank of India has not been buying gold at exactly the same pace as China in recent data, but the value of its existing gold reserves has risen sharply because of the increase in the gold price.

By mid-2026, the RBI’s gold holdings were around 880 tonnes, and gold’s share of India’s total reserves had risen from around 12% to 16%, largely because the value of gold had increased.

And then there is the Indian household.

India has one of the world’s largest private stocks of gold.

So India isn’t simply a country whose central bank owns gold.

Gold is already deeply embedded in the country’s household balance sheets.

That creates a fascinating difference between countries:

Some countries hold gold mainly through their central bank.

Some hold it through households.

Some increasingly do both.

Why would a country want gold when it can hold dollars?

This is the real question.

For decades, the US dollar has been the centre of the global reserve system.

And it still is.

The dollar remains by far the largest reserve currency.

According to the IMF’s latest COFER data, the US dollar represented 56.77% of allocated global foreign-exchange reserves in the fourth quarter of 2025. The euro was around 20.25%, while the renminbi was around 1.95%.

So this is not a story about the dollar suddenly disappearing.

It isn’t.

The dollar remains dominant.

But its share has gradually declined over the longer term, while gold has become more important.

And central banks are clearly thinking about diversification.

The World Gold Council’s 2026 survey found that 89% of reserve managers expected global central-bank gold holdings to increase over the following 12 months, while 45% expected their own institution’s gold holdings to increase.

Why?

Because diversification matters.

Imagine you have all of your wealth with one person.

And that person is extremely powerful.

Even if you trust them, you probably don’t want 100% of your wealth dependent on them.

You diversify.

Not necessarily because you believe that person will fail.

But because:

You don’t want a single point of failure.

The same logic can apply to national reserves.

The dollar is still dominant — but the world doesn’t have to hold only dollars

This distinction is incredibly important.

A gradual decline in the dollar’s share of reserves does not automatically mean countries are abandoning the dollar.

They can simply be adding other assets.

More euros.

More smaller reserve currencies.

More gold.

More diversification.

The IMF has specifically noted that the dollar’s declining share has increasingly been accompanied by a rise in nontraditional reserve currencies rather than simply one currency replacing the dollar.

And there is another technical point that is easy to miss.

The IMF reports reserve shares in US-dollar terms.

So if the dollar falls against another currency, the value of that other currency’s reserves rises when measured in dollars.

That can make the dollar’s share appear to fall even if a central bank hasn’t actually sold dollars.

The IMF has warned that exchange-rate effects can therefore distort the headline reserve-share movement. In the second quarter of 2025, for example, it estimated that exchange-rate effects explained about 92% of the reported decline in the dollar’s reserve share for that quarter.

So again:

The dollar is losing some ground.

But:

The dollar is not being replaced overnight.

The story is much more gradual.

Why gold is being treated differently again

The World Gold Council’s data show how strong this trend has become.

Central banks bought 863 tonnes of gold in 2025, after buying more than 1,000 tonnes annually in each of the preceding three years.

And the 2026 central-bank survey found that gold’s strategic importance continues to rise, with reserve managers citing factors including uncertainty, inflation concerns, interest rates, geopolitical risk and diversification.

This doesn’t mean central banks have decided:

“The dollar is dead.”

It means something subtler.

They appear to be saying:

“We don’t want all our reserves dependent on the same system.”

And that is a very different statement.

Debt, money and reserves are connected

Now we can see why the gold story belongs inside the debt story.

When governments borrow, they create bonds.

Those bonds become assets.

The financial system holds them.

Central banks manage monetary conditions.

Currencies move.

Interest rates change.

Inflation changes purchasing power.

Reserve managers decide how much exposure they want to different currencies and assets.

So debt isn’t happening in isolation.

It sits inside a much larger monetary system.

Debt → Money → Interest → Inflation → Reserves → Assets

That is why the question of government debt eventually becomes a question about money itself.

And then about what people trust as money.

The global financial system is a giant system of promises

Think about what different financial assets actually represent.

A government bond says:

“The government promises future payments.”

A mortgage says:

“I promise future repayments.”

A corporate bond says:

“The company promises future cash flows.”

A pension says:

“Future contributions and investment returns will fund future benefits.”

A stock represents a claim on:

“The future earnings and value of this company.”

Everything is ultimately looking forward.

The financial system is constantly asking:

What do we believe the future will produce?

How much will people earn?

How much will companies profit?

How much will governments collect in taxes?

How much will interest rates be?

How much will currencies be worth?

How much will assets be worth?

How productive will economies become?

How much debt can the system carry?

The entire financial world is, in a strange way, a gigantic market for expectations about the future.

Think about Person A and Person B

Let’s forget governments for a moment.

Person A needs:

₹100 today.

Person B gives Person A:

₹100.

But Person B says:

“You owe me ₹110 next year.”

Now Person A has a future obligation.

Person B has a future claim.

That’s debt.

Now imagine Person A doesn’t have enough money next year.

So Person A borrows:

₹100 from Person C.

Now:

Person A owes B.

And Person A owes C.

Again, this doesn’t automatically mean the system has collapsed.

If Person A’s income is growing and can support the obligations, everything can continue.

But imagine Person A keeps borrowing to pay previous obligations.

Now the system is becoming increasingly dependent on future income.

Scale that up.

Person A becomes a government.

Person B becomes a pension fund.

Person C becomes a bank.

Person D becomes an insurance company.

Person E becomes a foreign investor.

Person F becomes another financial institution.

Suddenly you have built a gigantic network of:

Claims on future economic output.

And this is where the financial system becomes fascinating.

The world is not just an economy

It is a network of promises.

The government promises the bondholder.

The bondholder expects the government to pay.

The company promises the lender.

The lender expects repayment.

The employee gives labour today expecting salary tomorrow.

The bank gives money today expecting repayment over years.

The investor buys a stock today because they believe the company will produce earnings tomorrow.

The person buys a house today with a mortgage because they expect their future income to support it.

Everything is connected to the future.

And perhaps that is what makes finance so fascinating.

Finance is ultimately the pricing of tomorrow.

Debt is one of the biggest ways we bring tomorrow into today.

And that can create extraordinary growth.

But it can also create extraordinary obligations.

So where does power enter the system?

Debt doesn’t require some secret room where everyone sits together and decides how to control the world.

The mechanism is much simpler.

If a government becomes heavily indebted, it becomes sensitive to:

• Interest rates
• Bond-market confidence
• Inflation
• Currency stability
• Tax revenue
• Economic growth
• Refinancing conditions
• Investor demand

That creates constraints.

A government may want to spend more.

But if interest costs are already enormous, additional borrowing becomes more expensive.

A government may want to cut taxes.

But if deficits are already large, that can create another financing problem.

A government may want to respond aggressively to another crisis.

But if debt is already very high, its fiscal room can be smaller.

This is what debt does.

It creates incentives and constraints.

You don’t need a conspiracy to explain that.

The structure itself creates the behaviour.

What happens when debt becomes too large?

There isn’t one universal answer.

Different countries have different options.

But broadly, governments facing debt pressure have several paths.

Grow faster

If productivity and economic output increase strongly, the economy can potentially grow faster than the debt burden.

This is the most attractive solution because it increases the size of the economic pie rather than simply cutting it.

Spend less or collect more

Governments can reduce structural deficits.

That can mean spending cuts, higher taxes, or some combination.

But these decisions can be politically difficult.

Allow inflation to reduce the real debt burden

Inflation can reduce the real value of fixed nominal debt.

But excessive inflation can damage savers, confidence and economic stability.

So this isn’t a free solution.

Restructure or default

Some governments can eventually reach a point where they cannot meet their obligations under existing terms.

Debt can then be restructured.

For countries with weak monetary credibility or limited access to financing, this can be extremely painful.

Financial repression

There is also a less obvious mechanism.

Governments can create conditions where domestic financial institutions hold significant amounts of government debt, sometimes at returns that are low relative to inflation.

This can help governments manage debt.

But the cost can effectively fall on savers.

None of these mechanisms is painless.

And none works equally well for every country.

The real danger isn’t that the world has debt

The world has had debt for centuries.

Debt itself isn’t new.

And debt isn’t inherently evil.

The real question is:

What is the debt doing?

Consider two models.

Borrow → build productive asset → asset generates income → repay debt

versus:

Borrow → consume → borrow again → refinance → borrow again → pay interest → borrow again

These are fundamentally different systems.

In the first:

Debt helps create future productive capacity.

In the second:

Debt increasingly becomes dependent on more debt.

And that second model is much harder to sustain indefinitely.

The IMF has been warning about deteriorating global fiscal conditions, elevated debt, rising interest burdens and persistent deficits.

So the concern isn’t imaginary.

But that doesn’t mean the entire global financial system is about to collapse either.

It means the system is under increasing pressure.

Are governments simply putting fuel on the fire?

In some countries, increasingly, that is a legitimate concern.

But again:

Not because all debt is bad.

Debt can build infrastructure.

Debt can fund productive investment.

Debt can help a government survive a crisis.

Debt can prevent an economic collapse.

Debt can create financial assets for pension funds and investors.

Debt can move resources from the present into productive future investment.

But debt can also fund consumption.

It can fund permanent deficits.

It can create interest obligations.

It can reduce future policy flexibility.

And eventually:

Debt can become dependent on more debt.

That is the part worth watching.

Are we moving from a debt system into a dangerous debt machine?

This is the question I would actually leave with the reader.

Because there is a point where debt stops being primarily a tool for building the future…

And starts becoming a mechanism for financing the past.

Borrowing creates interest.

Interest increases expenditure.

Higher expenditure creates larger deficits.

Larger deficits require more borrowing.

More borrowing increases the debt stock.

A larger debt stock creates more interest.

And the cycle begins again.

Borrow → interest → deficit → more borrowing → more interest.

That is the debt machine.

And the machine becomes increasingly dangerous if economic growth isn’t keeping pace with it.

This doesn’t mean collapse is inevitable.

It doesn’t mean the dollar is about to disappear.

It doesn’t mean gold will replace fiat currencies.

It doesn’t mean the US or UK is “going bankrupt.”

Those are all much stronger claims than the evidence supports.

But it does mean something important:

The margin for error is getting smaller.

And when the margin for error gets smaller, every shock becomes more important.

A recession.

A war.

An energy crisis.

A banking crisis.

A period of high inflation.

A sudden rise in bond yields.

A loss of investor confidence.

A currency shock.

Each one can make the mathematics harder.

The number itself isn’t the story

This may be the most important point in the entire article.

We obsess over numbers.

$30 trillion.

$35 trillion.

$40 trillion.

100% of GDP.

120% of GDP.

200% of GDP.

But the number itself isn’t the story.

The story is:

What is the debt financing?

If debt builds infrastructure that increases productivity, that’s one thing.

If debt funds productive investment, that’s another.

If debt funds a temporary crisis, that’s another.

If debt continuously funds consumption because governments cannot bring spending and revenue into balance, that’s different.

And if existing debt increasingly requires new debt simply to keep the system moving…

That’s different again.

Debt itself isn’t necessarily the problem.

The problem is what the debt produces.

What does all of this mean for your money?

This is where government debt stops being an economics lecture and becomes relevant to every ordinary person.

You don’t need to know every country’s debt number.

You need to understand the environment you’re living and investing inside.

Because the debt system interacts with:

Interest rates

Inflation

Currencies

Property

Stocks

Bonds

Gold

Business profits

Government taxation

Economic growth

When debt rises and governments need to refinance enormous amounts of borrowing, interest rates become extremely important.

When inflation rises, central banks may respond by changing rates.

When rates rise, borrowing becomes more expensive.

That can affect mortgages.

It can affect property demand.

It can affect corporate borrowing.

It can affect stock valuations.

It can affect bonds.

It can affect currencies.

It can affect gold.

And then the entire cycle comes back around.

Debt → Money → Interest → Inflation → Assets

Economic activity can increase.

↓

Asset prices can rise.

↓

Inflation can rise.

↓

Central banks can respond through interest rates.

↓

Borrowing costs change.

↓

Government interest costs change.

↓

Corporate profits and investment decisions change.

↓

Asset prices respond again.

That is why a decision made by a central bank thousands of kilometres away can eventually affect the price of the apartment you’re considering in Gurugram.

Everything is connected.

This is why debt matters to a real-estate buyer

Suppose you’re buying a ₹2 crore property.

You may think your biggest questions are:

What is the location?

What is the price per sq ft?

What is the rental yield?

What is the appreciation potential?

But there is another layer.

What are interest rates doing?

What is inflation doing?

How much are banks willing to lend?

What is happening to household purchasing power?

What is happening to construction costs?

What is happening to government spending?

What is happening to infrastructure investment?

What is happening to the currency?

You don’t have to predict these things perfectly.

You simply have to understand that your property exists inside this larger financial system.

The same applies to stocks.

The same applies to gold.

The same applies to bonds.

The same applies to businesses.

The asset is not operating in isolation.

It exists inside an economy built around these promises.

The questions you should actually ask about a country’s debt

When you look at the debt of a country — whether it is the United States, the United Kingdom, India, China or Japan — don’t just ask:

How much debt does it have?

Ask:

What interest rate is the government paying?

Because ₹100 of debt at 2% is a very different burden from ₹100 at 8%.

Who owns the debt?

Domestic banks?

Pension funds?

Foreign investors?

The country’s own central bank?

Because ownership tells you where the interest payments ultimately flow.

What currency is the debt denominated in?

A country borrowing in its own currency has different options from a country heavily dependent on foreign-currency debt.

How much tax revenue does the government generate?

Because ultimately, governments need revenue to fund spending and service debt.

How fast is the economy growing?

Because a growing economy can make an existing debt burden easier to carry.

How productive is the economy?

Because GDP growth built on genuine productivity is very different from growth driven purely by borrowing and asset inflation.

How much of the debt is short-term and needs refinancing soon?

Because debt that has to be rolled over quickly becomes much more sensitive to interest rates.

What assets does the government or broader economy have?

Because a balance sheet isn’t only about liabilities.

And perhaps now we should add another question:

What does the country hold as a reserve?

Dollars?

Euros?

Gold?

Other currencies?

Strategic assets?

Because the composition of a country’s reserves tells you something about what it believes it needs protection from.

The future isn’t necessarily doomed — but the assumptions are getting bigger

This is where I would separate fear from awareness.

The world has solved enormous economic problems before.

Technology can increase productivity.

AI could create significant economic gains.

Emerging economies can continue growing.

Governments can reform spending.

Tax systems can change.

Debt can be managed.

Inflation can be controlled.

New industries can create enormous wealth.

There are many ways the future could produce more economic value than we currently imagine.

But that is exactly the point.

The system needs the future to deliver.

It needs productivity.

It needs growth.

It needs innovation.

It needs tax revenue.

It needs functioning financial markets.

It needs investors willing to buy debt.

It needs central banks to maintain monetary credibility.

It needs governments to eventually bring promises and resources into a sustainable relationship.

And with so many promises already made against future income, the burden on that future is enormous.

So perhaps the most honest way to look at the situation is:

The future isn’t necessarily bleak.

But the future has been heavily mortgaged.

And the more we borrow against tomorrow, the more tomorrow has to produce.

Why this is not simply a story about debt

At this point, something should become clear.

The debt story is really several stories sitting inside one another.

It is a story about government spending.

It is a story about taxation.

It is a story about bonds.

It is a story about interest.

It is a story about economic growth.

It is a story about monetary policy.

It is a story about inflation.

It is a story about currencies.

It is a story about reserves.

It is a story about gold.

It is a story about financial assets.

And ultimately, it is a story about what we believe the future will be worth.

The world is not just running out of money

The world isn’t necessarily running out of money.

Something much more interesting is happening.

The world is running on promises about future money.

Governments promise future tax revenues.

Companies promise future earnings.

Borrowers promise future repayments.

Bonds represent claims on future cash flows.

Pension systems depend on future contributions and investment returns.

Investors price companies based on their expected future profits.

Banks lend against future income.

Mortgages depend on future salaries.

And governments issue debt based on their ability to generate future revenue.

The entire financial system is constantly asking one question:

What do we believe the future will produce?

And every day, trillions of dollars move around based on the answer.

The reserve system is another layer of the same story

When a country has trillions of dollars of trade, debt and financial obligations, it doesn’t simply keep all of its wealth sitting in cash.

Central banks hold foreign exchange reserves.

They may hold US dollars.

Euros.

British pounds.

Japanese yen.

Other currencies.

Government bonds.

And increasingly:

Gold.

Why?

Because a reserve is supposed to give a country something it can rely on when the world becomes uncertain.

And gold gives central banks something different.

A government bond is a claim on another balance sheet.

A currency exists inside another monetary system.

Gold is a physical reserve asset.

That doesn’t make gold automatically superior.

But it gives a country another form of diversification.

Diversification doesn’t mean abandonment

Imagine you have all of your wealth with one person.

And that person is extremely powerful.

Even if you trust them, you probably don’t want 100% of your wealth dependent on them.

You diversify.

Not necessarily because you believe that person will fail.

But because:

You don’t want a single point of failure.

The same logic can apply to national reserves.

A gradual decline in the dollar’s share of reserves does not automatically mean countries are abandoning the dollar.

They can simply be adding other assets.

More euros.

More smaller reserve currencies.

More gold.

More diversification.

The IMF has specifically noted that the dollar’s declining share has increasingly been accompanied by a rise in nontraditional reserve currencies rather than simply one currency replacing the dollar.

And there is another technical point that is easy to miss.

The IMF reports reserve shares in US-dollar terms.

So if the dollar falls against another currency, the value of that other currency’s reserves rises when measured in dollars.

That can make the dollar’s share appear to fall even if a central bank hasn’t actually sold dollars.

The IMF has warned that exchange-rate effects can therefore distort the headline reserve-share movement.

So again:

The dollar is losing some ground.

But:

The dollar is not being replaced overnight.

The story is much more gradual.

And perhaps this is why gold is becoming interesting again

Not because gold is magical.

Not because fiat money is worthless.

Not because the dollar is disappearing.

But because gold represents something different.

A government bond is a promise.

A currency is part of a monetary system.

Gold is a physical asset.

And when the world is carrying an extraordinary amount of financial promises, some governments and investors naturally want something on their balance sheet that isn’t itself another country’s liability.

That is what makes the gold accumulation story so interesting.

The World Gold Council’s 2026 survey found that 83% of reserve managers expected gold to represent a higher share of total reserves five years from now.

That is not proof that gold will replace the dollar.

But it is evidence that the people managing national reserves are taking the asset increasingly seriously.

Government debt creates claims on future public finances.

The real question for us isn’t “Should I be scared?”

It is:

“Do I understand the system I am participating in?”

Because you are already inside it.

Your bank account is inside it.

Your mortgage is inside it.

Your investments are inside it.

Your property is inside it.

Your pension is inside it.

Your business is inside it.

Your currency is inside it.

And even the price of your everyday life is influenced by it.

You don’t need to become an economist.

You don’t need to predict the next recession.

You don’t need to predict whether the dollar will rise or fall.

You don’t need to predict whether gold will outperform property.

You don’t need to predict whether stocks will rise.

You simply need to understand the machinery.

Because once you understand the machinery, the headlines become much easier to understand.

Debt, money, interest, inflation and assets

This is the wider system:

Government debt rises

↓

Governments issue more bonds

↓

Investors demand returns

↓

Interest costs rise when financing becomes more expensive

↓

Central banks balance inflation and growth

↓

Currencies move

↓

Reserve managers reconsider diversification

↓

Gold becomes more attractive as a non-sovereign reserve asset

↓

Investors reassess what they believe will preserve purchasing power

↓

Asset prices respond

↓

Economic behaviour changes

↓

Government revenue and spending change

↓

The debt cycle continues

This is why gold isn’t simply a commodity story.

The dollar isn’t simply a currency story.

And government debt isn’t simply a government story.

They are all parts of the same financial system.

The future isn’t necessarily doomed

This is where I would separate fear from awareness.

The world has solved enormous economic problems before.

Technology can increase productivity.

AI could create significant economic gains.

Emerging economies can continue growing.

Governments can reform spending.

Tax systems can change.

Debt can be managed.

Inflation can be controlled.

New industries can create enormous wealth.

There are many ways the future could produce more economic value than we currently imagine.

But that is exactly the point.

The system needs the future to deliver.

It needs productivity.

It needs growth.

It needs innovation.

It needs tax revenue.

It needs functioning financial markets.

It needs investors willing to buy debt.

It needs central banks to maintain monetary credibility.

It needs governments to eventually bring promises and resources into a sustainable relationship.

And with so many promises already made against future income, the burden on that future is enormous.

So perhaps the most honest way to look at the situation is:

The future isn’t necessarily bleak.

But the future has been heavily mortgaged.

And the more we borrow against tomorrow, the more tomorrow has to produce.

And this brings us back to the original question

Remember where we started?

If everyone owes money, who is everyone borrowing from?

The answer is:

Everyone is borrowing from someone else inside the financial system.

Governments borrow from investors.

Banks hold government bonds.

Pension funds hold government bonds.

Insurance companies hold bonds.

Central banks hold assets.

Companies borrow from banks and bond investors.

Individuals borrow from banks.

Investors buy financial assets representing claims on future cash flows.

One person’s liability becomes another person’s asset.

One person’s promise becomes another person’s investment.

And those promises keep circulating.

That’s the financial system.

But then comes the really big question

If the financial system is ultimately built on promises about the future…

What happens when the promises become bigger than the future economy can comfortably support?

That’s the question.

Not:

“Does the world have debt?”

Of course it does.

Not:

“Is debt automatically bad?”

It isn’t.

The question is:

Is the future economic value being created large enough to support the promises being made today?

That is the real issue.

The future is carrying an enormous amount of baggage from the past

There are reasons to be concerned.

Global public debt is extremely high.

The IMF has warned that global public debt could approach 100% of global GDP by 2029.

US interest costs are rising.

UK debt-interest costs are rising.

Many developed economies have ageing populations.

Governments have made enormous promises around pensions, healthcare and public services.

Geopolitical tensions remain high.

And governments still face pressure to spend.

At the same time, the global economy needs to keep growing strongly enough to support all of these obligations.

So yes:

What happens when the promises become too large?

There isn’t one universal answer.

Different countries have different options.

They can grow.

They can raise taxes.

They can reduce spending.

They can tolerate some inflation.

They can restructure debt.

They can use financial repression.

They can refinance.

And, in extreme cases, governments can default or restructure their obligations.

None of these mechanisms is painless.

And none works equally well for every country.

That is why the important question isn’t:

“Will the world collapse?”

The better question is:

“How much room does the system have to absorb the next shock?”

And perhaps this is the real meaning of debt sustainability

Debt sustainability isn’t simply about whether a government can technically borrow more.

It is about whether the government can continue making its promises without progressively damaging the economic system that supports those promises.

Can it pay interest?

Can it refinance?

Can it maintain investor confidence?

Can it maintain monetary credibility?

Can it support economic growth?

Can it respond to another crisis?

Can it maintain essential public services?

Can it do all of this without requiring ever larger amounts of borrowing?

Those are much more useful questions than simply asking whether a country has “too much debt.”

What do we believe the future will produce?

How much will people earn?

How productive will workers become?

How much will businesses produce?

How much tax revenue will governments collect?

How much will technology increase output?

How much will money retain its purchasing power?

How much will investors trust governments?

How much debt can the system carry?

The financial system is constantly pricing the future.

Finance is ultimately the pricing of tomorrow

That may be the deepest way to understand the entire system.

You borrow today because you believe tomorrow’s income will be greater.

A company raises debt because it believes future profits will be sufficient.

A government issues bonds because it believes future tax revenues and economic activity will support its obligations.

An investor buys a stock because they believe the company will produce future earnings.

A pension fund invests today because it expects future returns.

A bank lends against future income.

A person takes a mortgage because they expect their future salary to support it.

Everything is connected to tomorrow.

Debt is one of the biggest mechanisms by which we bring tomorrow into today.

And that can create extraordinary growth.

But it can also create extraordinary obligations.

So, who does the world owe all this money to?

Banks.

Pension funds.

Insurance companies.

Investment funds.

Central banks.

Foreign governments.

Companies.

Individuals.

And ultimately, the financial system itself is full of interconnected claims.

One person’s debt becomes another person’s asset.

One government’s borrowing becomes another institution’s investment.

One person’s promise becomes another person’s expected income.

And all of it ultimately rests on something that doesn’t appear on a balance sheet:

The future economic capacity of society.

That’s why debt-to-GDP matters.

That’s why productivity matters.

That’s why interest rates matter.

That’s why inflation matters.

That’s why economic growth matters.

And that’s why the question of government debt isn’t really just about governments.

It is about all of us.

The final question

So perhaps the question we should ask isn’t:

“Is the world in debt?”

We already know the answer.

Yes.

The better question is:

“What are we borrowing for?”

Are we borrowing to build something that makes tomorrow more productive?

Are we borrowing to survive a crisis?

Are we borrowing to invest?

Or are we borrowing simply to maintain a lifestyle that today’s revenues can no longer support?

Because there is a massive difference between:

Borrow → build → grow → earn → repay

and:

Borrow → consume → refinance → borrow again → pay interest → borrow again.

One creates future capacity.

The other creates dependence on future borrowing.

And that distinction may matter more than the headline debt number itself.

Because ultimately:

The number isn’t the story.

The debt is the story of a promise.

And the real question is whether the future will produce enough real economic value to honour the promises we are making today.

That is what the financial system is really asking us.

Every government.

Every company.

Every bank.

Every investor.

Every borrower.

Every one of us.

What will tomorrow produce?

Because today’s money is only one part of the equation.

The other part is tomorrow.

And the entire world financial system is, in one way or another, making bets on it.

And that is perhaps the real story behind the world’s biggest IOU.

Every trillion dollars of debt represents more than a number.

It represents a claim on future resources.

Future taxes.

Future economic output.

Future productivity.

Future income.

Future generations.

And eventually, the future has to arrive.

The question is whether the world economy will grow fast enough to meet all the promises we are making today.

Because if it does, debt can remain a powerful tool.

But if it doesn’t, the debt machine becomes much harder to control.