Why All Countries Have Debt — And Who They're Borrowing From?

In 2025, the global debt landscape has reached unprecedented levels. The United States' national debt stands at approximately $36.22 trillion, exceeding 120% of its GDP. Japan's debt-to-GDP ratio is projected to be around 248.67%. Public debt worldwide has surpassed $100 trillion, raising concerns about economic sustainability.

What Is National Debt?

National debt, also known as public or sovereign debt, refers to the total amount a government owes to creditors. This debt accumulates when a government's expenditures exceed its revenues, leading to borrowing to cover the shortfall. It's important to note that national debt pertains solely to the central government's obligations, excluding local or state debts and private liabilities like mortgages or credit card balances.​

Why Do Countries Borrow Money?

1. Budget Deficits

Governments often spend more than they earn. For instance, the U.S. recorded a $1.1 trillion budget deficit by February 2025, marking an 18% increase from the previous year.

2. Economic Stimulus

Borrowing enables investments in infrastructure, education, and healthcare, fostering economic growth. Such investments can lead to increased tax revenues, aiding in debt repayment.​

3. Crisis Management

Emergencies like wars, natural disasters, or pandemics necessitate immediate funding. During the COVID-19 pandemic, the U.S. borrowed $3.8 trillion in 2020 alone to support relief efforts.​

4. Refinancing Existing Debt

Governments often issue new debt to repay maturing obligations. While common, this practice can lead to a debt spiral if not managed prudently.​

5. Monetary Policy Tools

Issuing government bonds can help control inflation and stabilize the economy. By adjusting bond issuance, central banks influence money supply and interest rates.​

Who Lends Money to Countries?

1. Domestic Investors

Citizens, banks, and institutions purchase government bonds, effectively lending money to their government. In the U.S., intragovernmental holdings, such as those by the Social Security Trust Fund, account for about $7.32 trillion of the national debt.

2. Foreign Entities

Foreign governments and investors buy government securities. As of January 2025, Japan holds $1.09 trillion, and China owns $768.6 billion in U.S. debt.​

3. International Organizations

Institutions like the International Monetary Fund (IMF) and World Bank provide loans, especially to developing countries. The IMF's lending capacity stands at around $932 billion.​

Is National Debt a Bad Thing?

Debt isn't inherently detrimental. When used for productive investments, it can stimulate economic growth. However, excessive debt poses risks:​

• Debt-to-GDP Ratio: A key indicator of debt sustainability. While no universal threshold exists, ratios above 60% are often viewed cautiously. The U.S. debt-to-GDP ratio is projected to reach 127.8% by 2026.​
• Interest Payments: High debt leads to significant interest obligations, diverting funds from essential services. In 2025, the U.S. allocated $582.5 billion, or 16% of federal spending, to interest payments.
• Investor Confidence: Mounting debt can erode investor trust, leading to higher borrowing costs or reduced investment.​

Can a Country Be Debt-Free?

While theoretically possible, few nations are debt-free. Countries like Brunei and Liechtenstein maintain minimal debt levels, thanks to substantial revenues from natural resources or prudent fiscal policies. However, most governments prefer maintaining some debt to finance growth and provide investment opportunities through bonds.​

Conclusion: Managing Debt Wisely

Debt is a double-edged sword. When managed responsibly, it can drive development and prosperity. However, unchecked borrowing can lead to economic instability. As global debt levels rise, the focus must shift from eliminating debt to managing it effectively, ensuring sustainable growth for future generations.