Global government debt has passed 111 trillion dollars. That is about 95% of everything the world produces in a year. The United States alone owes around 38 trillion dollars. China and Japan together add tens of trillions more. Many people see these numbers and feel fear. But very few stop to ask a simple question: who is actually lending all this money?
Felix Prehn, former investment banker and founder of Goat Academy, explains that the answer is both simple and surprising. In many cases, countries are borrowing from themselves. And regular savers, through pensions and bank products, are often the real lenders without even knowing it.
How Governments Borrow From Themselves
In the United States, government debt falls into two main groups.
- Intragovernmental holdings
This is debt that one part of the government owes to another part. For example, the Social Security Trust Fund holds trillions of dollars in U.S. government bonds. Federal employee retirement funds also hold large amounts. In simple terms, the government borrows from its “left pocket” to pay its “right pocket.”
- Debt held by the public
This is debt held outside these internal funds. The largest single holder here is the Federal Reserve, the U.S. central bank. The central bank creates new money and uses it to buy government bonds. On paper, the government owes money to the central bank, but both belong to the same national system.
The rest of this public debt is owned by pensions, insurance companies, banks, mutual funds, and individual investors. That means many ordinary people who worry about national debt are actually among the lenders. Their retirement savings help fund the very debt that concerns them.
The Global Money Circle
Other countries also lend to the U.S. Japan and China, for example, hold hundreds of billions in U.S. government bonds. This happens through trade. The U.S. buys cars, electronics, and other goods. Exporting countries receive U.S. dollars. They then look for a safe place to park those dollars and often choose U.S. government bonds, which are seen as very secure.
So money flows in a circle:
- Citizens and workers save in pensions and bank products.
- These savings are used to buy government bonds.
- Governments also borrow from their own funds and central banks.
- Trade partners lend back the dollars they earned by selling goods.
This is not a scam. It is simply how the modern financial system works. The real question is not “Is it real?” but “Is it sustainable?” That is where inflation and wealth transfer come in.
How Inflation Quietly Transfers Wealth
Inflation means that prices rise over time, and each unit of money buys less. For example, with 5% inflation for 10 years, the real value of 100,000 dollars of cash falls to about 61,000 dollars in today’s purchasing power. The saver has lost 39,000 dollars in real terms, even if the number in the bank account stayed the same.
Governments can use inflation to reduce the real burden of their debt. When prices and wages go up, the fixed amount they owe becomes easier to repay in “cheaper” money. At the same time, people who hold cash or low-yield savings see their spending power shrink.
Felix Prehn points out that this process can act like a hidden tax. It tends to:
- Hurt savers, salary earners, and people who keep most of their wealth in cash or simple bank products.
- Help those who own real assets and strong businesses that can raise prices with inflation.
This is why understanding inflation is so important for long-term investors.
What History Teaches About Debt and Money
Several major episodes in history show what can happen when debt and money creation go too far:
- Roman Empire: For centuries, Rome used a silver coin called the denarius. Over time, emperors mixed cheaper metals into the coins to stretch their budgets. By the third century, the coin had only a small amount of real silver left. Prices rose sharply, trust in money collapsed, and people turned to barter and real goods. Wealthy citizens who owned land and tangible assets were protected.
- Weimar Germany: After World War I, Germany printed huge amounts of money to cover debts and reparations. By 1923, one U.S. dollar was worth trillions of German marks. Savers and workers saw their money become almost worthless. But people with large debts found that inflation wiped their debts away.
- End of the Gold Standard: In the 1970s, the U.S. cut the link between the dollar and gold. After that, total global debt grew rapidly. Periods of high inflation and financial crises became more common.
These examples show a pattern. When money is weakened, savers in cash suffer. People who hold real assets, like land and strong businesses, tend to come out ahead.
Which Assets May Benefit, and Which to Avoid
Based on these patterns, Felix Prehn highlights some key ideas for investors:
- High-quality companies with pricing power:
Pricing power means a company can raise its prices without losing many customers. This often happens when customers are loyal or when it is hard to switch to another provider. When such companies face inflation, they can pass higher costs on to buyers. Their revenues and profits can grow at least in line with inflation. Over long periods, broad stock markets like the S&P 500 have historically returned around 10% per year on average, although past results do not guarantee future returns.
- Real estate:
During inflation, rents tend to rise. This means the income from property can go up with the general price level. This makes real estate a common hedge against inflation.
- Commodities and precious metals:
Assets like gold and silver have often held value when paper money loses purchasing power. Their prices may rise as more money is created and confidence in currencies drops.
- Inflation-linked bonds:
Some bonds adjust their payouts based on inflation. These may not create great wealth, but they can help protect purchasing power better than regular cash savings.
On the other hand, certain assets may be risky in a high-debt, higher-inflation world:
- Long-term fixed-rate bonds:
These pay a fixed interest rate for many decades. If inflation stays high, the real value of these payments can be badly eroded.
- Large cash holdings:
Keeping too much money in cash or very low-yield accounts exposes savers to slow but steady loss of purchasing power.
- Putting everything in one idea or sector:
Concentrating all wealth in a single stock, theme, or asset type can magnify risk. If that area suffers, the entire portfolio suffers with it.
Why Selling Rules Matter as Much as What You Buy
Many retail investors spend most of their time choosing what to buy. They follow news, read social media, and debate which stock or coin might go up next. But professional investors often focus more on how and when to sell.
Important ideas here include:
- Letting winners run:
Instead of selling every time a stock rises a little, experienced investors often allow strong positions to grow, while still managing risk.
- Cutting losers quickly:
Selling weak positions before they become large losses can protect capital and reduce emotional stress.
- Rebalancing:
From time to time, investors may adjust their portfolios to keep risk at a level that fits their age, goals, and comfort. This can mean trimming some positions that grew very large and adding to areas that have become too small.
The key lesson is that risk management and exit rules are not an afterthought. They are a core part of long-term success.
Learning the Rules of the Modern Debt System
The modern system of government debt, central banks, and global trade can seem complex. Yet, at its heart, it is a network of promises and claims between governments, citizens, and institutions. Understanding this system can turn fear into clarity.
Felix Prehn and Goat Academy focus on making these ideas simple for regular investors. The goal is not just to pick the next hot stock, but to see how debt, inflation, and asset prices interact over years and decades. Readers who want to know more about Felix Prehn and Goat Academy can learn further on the Goat Academy about page.
In a world where nearly every country is in debt, the people who understand how the money loop works—and how inflation shifts wealth—have a clear advantage. With the right knowledge, they can use this system to protect and grow their savings, rather than become victims of it.