The world owes $345 trillion (but who truly holds the debt?)

It's August 15th, 1971. President

Richard Nixon appears on live television and announces that the United States will no longer convert dollars into gold.

>> I have directed Secretary Connley to suspend temporarily the convertability of the dollar into gold or other reserve assets.

>> It seems like a minor technicality, but what follows is monumental. Money once

anchored to something physical becomes pure fiat currency backed by nothing more than government decree.

Immediately thereafter things begin to change. Global debt takes a life of its

change. Global debt takes a life of its own and over the next few decades it balloons from billions to trillions.

Today it stands at $345 trillion give or take. That's three times the size of the

take. That's three times the size of the entire global economy. America alone

accounts for 38 trillion of that. But

there's something strange about all this. You see, the US owes China roughly

this. You see, the US owes China roughly $770 billion. Yet, China itself is

$770 billion. Yet, China itself is drowning in $18 trillion worth of debt.

Much of it sits with Chinese banks, the same banks that also own American debt.

American banks, in turn, are holding debt from China, Europe, and just about everyone else. But here's the paradox.

everyone else. But here's the paradox.

If everyone owes money to everyone else, then who is all that money actually going to? The answer isn't what you

going to? The answer isn't what you think. Follow the money far enough, and

think. Follow the money far enough, and the trail circles back to where it started. The world essentially owes

started. The world essentially owes money to itself, and it works so long as no one checks the math. Today's video is sponsored by Sift. Every day, we're

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Debt is as old as civilization itself.

Long before banks or paper money, debt was simply a promise. A neighbor lends you a bag of grain in spring and come harvest you pay them back maybe with a

little extra as thanks. This is how societies operated for thousands of years. However, as trade expanded beyond

years. However, as trade expanded beyond local communities, these arrangements grew more complex. During the

Renaissance, Italian banking houses created credit instruments, ways to transfer debt rather than just hold it personally. This allowed merchants to do

personally. This allowed merchants to do business across continents without carrying chests of gold. The real

breakthrough, however, came in 1694 when Britain faced a funding crisis under King William III. The Royal Navy desperately needed 1.2 million to

finance the war with France, but the government's credit was poor and [music] direct borrowing proved impossible. So

the royal court came up with an ingenious solution. Create a corporation

ingenious solution. Create a corporation called the Bank of England and allow investors to become shareholders. The

bank would then lend the money to the government and charge 8% interest. In

return, it received government bonds which could be resold to the public or to anyone willing to buy them. Suddenly,

for the first time, ordinary citizens could effectively lend money to the state through a reliable agent. It was a simple scheme, but it changed

everything. States could now raise

everything. States could now raise massive sums without hiking taxes or draining their treasuries. The system

quickly spread across Europe and became the bedrock of early capitalism. Then,

during the industrial revolution, the system went into overdrive. Factories,

railroads, and infrastructure required unprecedented amounts of capital, far more than any single wealthy individual could muster. The banks that had been

could muster. The banks that had been set up pulled saving deposits and lent them to industrialists. By doing so, borrowing became not just useful, but

structurally necessary for economic growth. By the 20th century, World War I

growth. By the 20th century, World War I and World War II pushed countries to borrow at scales never before seen, not just to fight, but to rebuild afterward.

In 1944, the Breton Woods agreement made the US dollar the centerpiece of the global financial system with currencies tied to the dollar and the dollar tied

to gold. But gold was limited and

to gold. But gold was limited and economies had to grow. So, as US spending accelerated during the Vietnam War and the Great Society programs,

there wasn't enough gold to back the flood of dollars circulating globally, forcing Nixon to sever the link in 1971.

The consequences were profound. From

that point forward, governments gained the ability to create money at will. And

with the old restraints gone, a new system emerged where debt could expand as long as lenders remained confident in government decrees. Steadily throughout

government decrees. Steadily throughout the 1980s, nations discovered that borrowing wasn't just useful in wartime.

It could fuel peacetime growth, too. And

so, governments borrowed to build schools, repair roads, and pull economies out of recession. Debt stopped

being a last resort and became standard operating procedure. Today, debt is how

operating procedure. Today, debt is how things get built, how recessions are managed, and how political promises are kept. Debt is no longer an anomaly in

kept. Debt is no longer an anomaly in the system. It has become the system

the system. It has become the system itself.

The United States offers the clearest example of how this self-reinforcing system actually works. With $ 38 trillion in debt, no other country comes

even close. Yet, roughly 70% of that

even close. Yet, roughly 70% of that debt is owed to Americans themselves.

The US in essence borrows from its own citizens. You see, when someone deposits

citizens. You see, when someone deposits money in a bank, it doesn't just sit in a vault. Banks put that money to work

a vault. Banks put that money to work trying to grow it so they can pass some interest back to depositors. They do

this by lending, investing, and buying bonds. Right now, US commercial banks

bonds. Right now, US commercial banks hold about $4.6 trillion in Treasury bonds and other government securities,

which is more than the GDP of Japan or India. Bonds are particularly popular

India. Bonds are particularly popular because they're one of the safest ways to earn interest. [music]

And unlike stocks that swing wildly every day, a 10-year US government bond today pays a steady annual interest rate, offering reliable returns with

little risk. But banks aren't alone in

little risk. But banks aren't alone in this. Pension funds, insurance

this. Pension funds, insurance companies, and investment firms all do the same. So essentially, private

the same. So essentially, private savings have become an indirect form of government borrowing. And although it

government borrowing. And although it sounds odd that the US borrows from itself, think of it as money moving from parts of the country where it's sitting idle to parts where it's needed. When

the government pays interest on its debt, the money flows back to lenders, giving them more cash to buy more bonds and earn more interest. It's a closed

loop where money cycles endlessly from lender to borrower and back again. The

same loop exists between countries.

About 30% of US debt is held overseas.

Foreign governments and banks buy US bonds the same way American institutions do. Money flows into the US when it

do. Money flows into the US when it borrows, flows back out when it pays interest, and the cycle repeats. And

it's not just America that does this.

Every country borrows, and every country lends. Japanese savings are turned into

lends. Japanese savings are turned into loans for the Saudis. Saudi savings

become loans for Brazilians. Brazilian

capital flows back into US bonds. This

interconnected web creates an uneasy reality. To repay debts, governments

reality. To repay debts, governments must keep borrowing more and more. That

may sound reckless, and in many ways it is, but it's also the foundation of how the global economy now works.

>> [music] >> Everything from economic growth to political stability depends on this endless cycle continuing. Since debt

fuels growth, governments have no choice but to borrow and spend and get money circulating in the economy. By doing so, businesses earn more. Workers get paid

and as a result, they spend more. It

becomes a feedback loop that keeps the economy expanding.

>> [music] >> In China, about a fifth of government spending is financed by borrowing. In

the US, it's one in every $4. If

governments stopped borrowing overnight, public spending would fall immediately.

Money would stop flowing into the economy, businesses would earn less, layoffs would increase, and [music] consumer spending would grind to a stop.

That's precisely what happened when COVID hit in 2020. As people stopped spending and the economy shut down, governments stepped in and covered

expenses people were unwilling to pay.

In America, the government borrowed $3.1 trillion in a single year, which was about 12% of the economy at the time.

China, Europe, and every other major economy did the same. It wasn't a choice [music] really. It was necessity.

[music] really. It was necessity.

However, borrowed money must eventually be returned. If a government already

be returned. If a government already spends everything it collects to keep the economy going, then it must take out new loans to repay the old ones. So, the

debt never truly leaves the system. It

just adds up. Wealthier countries such as Germany and Switzerland can afford to cycle through this system. Their bonds

are considered safe, so they keep borrowing at low interest rates. But for

developing nations, it's different.

Higher borrowing costs make each rollover more expensive. Over time, debt starts to feed on itself. Countries like

Kenya and Pakistan, for instance, are stuck in debt traps and forced to keep borrowing just to meet interest payments on past loans. So, the same debt that

strengthens some economies can end up holding others back.

>> [music] >> Debt-driven economies carry inherent dangers. No matter how smooth the cycle

dangers. No matter how smooth the cycle seems, risks are building beneath the surface. As governments continue

surface. As governments continue borrowing, debt grows and so do interest payments. Over time, a bigger slice of

payments. Over time, a bigger slice of the budget goes toward paying off old loans rather than funding schools, hospitals, or infrastructure. A debt to

GDP ratio of about 100% is now considered normal. And frankly, debt is

considered normal. And frankly, debt is not a problem so long as borrowing is cheap and lenders are confident. But

when political risks change and investors stop wanting to lend, borrowing costs shoot up. So perception

is the real driver of the economy. One

way governments keep a lid on things is by printing more money. Banks call it quantitative easing. The problem,

quantitative easing. The problem, however, is that when more money enters circulation, the value of each unit declines. The result is inflation and

declines. The result is inflation and higher everyday costs. In extreme cases, it spirals out of control. In Zimbabwe

in 2008, the government printed so much money to cover debts that prices doubled every single day. A loaf of bread that cost 10 million Zimbabwe dollars in

March suddenly cost hundreds of millions by midyear and billions by November. The

government eventually printed $100 trillion notes to cope with the situation, but that only made it worse.

The currency became worthless and ordinary people saw their life savings vanish overnight. While most countries

vanish overnight. While most countries don't face such extremes, even moderate inflation can hurt. The risks are even bigger for developing countries which

often borrow in foreign currencies such as US dollars. Meaning when their own currency weakens, debt repayments suddenly become more expensive in local

terms. And as that burden grows, lenders start doubting the country's ability to repay. That's pretty much what happened

repay. That's pretty much what happened in Turkey. Once the mood shifts and

in Turkey. Once the mood shifts and doubt sets in, investors tend to demand higher interest rates to compensate for the risks. And when borrowing hits a

the risks. And when borrowing hits a wall, governments are forced into ugly tradeoffs. They can either cut spending,

tradeoffs. They can either cut spending, raise taxes, or expand the money supply.

Each of these options comes with severe consequences. All in all, the global

consequences. All in all, the global economy is wired for constant momentum.

Debt isn't a flaw. It's what keeps nations running, borrowing, lending, spending, and starting over. This

perpetual motion, however, can't keep going forever. Eventually, there will be

going forever. Eventually, there will be a reckoning, an economic depression.

Centuries ago, physics proved that perpetual motion is impossible.

Economics is yet to come around. Before

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Party. They produce sharp, well-ressearched videos on global affairs. And if you enjoy this channel,

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