Debt, power & illusion of wealth

The modern global economy presents a paradox that few policymakers are willing to confront. The world today is buried under an estimated US$317 trillion of debt—roughly three times the global output. United States alone carries over US$36 trillion in public debt, while China, Japan, and Europe follow with similarly staggering figures. However, despite this unprecedented accumulation of liabilities, the system continues to function—indeed, it is expanding. This raises a question that lies at the heart of modern political economy: if everyone is in debt, who is the creditor? The answer exposes not merely an accounting identity but a structural design. For every liability, there exists a corresponding asset. If the world owes US$317 trillion, someone holds US$317 trillion in claims. These claims are concentrated in central banks, large financial institutions, institutional investors, foreign sovereigns, and, ultimately, the wealthiest segments of society. Debt therefore is not just a financial instrument—it is a mechanism of wealth transfer. The actual crisis lies not in the burden of the debt itself, but in the predatory mechanics of its creation. Contrary to popular belief, banks do not lend pre-existing money. In contemporary financial systems, lending itself creates money. When governments issue bonds, central banks and commercial banks purchase them not from accumulated savings, but through balance-sheet expansion—effectively creating purchasing power ex-nihilo [from or out of nothing]. Only the principal is created in this process; the interest [‘profit on debt’ in Pakistan to unsuccessfully and artificially avoid riba] is not. This simple but overlooked fact produces a structural imbalance. When a government borrows at interest, the system generates the principal, but not the additional amount required to service that debt. The gap can only be filled through further borrowing, higher taxation, or asset transfers. In effect, the system requires continuous expansion of debt merely to sustain itself. This is not an anomaly—it is the operating logic of the system. The consequences are visible across both developed and developing economies. Public finance has become structurally dependent on borrowing. Governments finance deficits through debt, banks prefer sovereign lending over private investment due to its perceived safety, and real-sector growth is crowded out. Wealth accumulates in financial assets rather than productive enterprises. Pakistan’s predicament is often treated as exceptional. It is not. It is a local manifestation of a global design. The country’s fiscal fragility—high debt servicing, low development spending, and limited private investment—reflects the same structural logic that governs advanced economies. The difference lies only in degree, not in nature. When banks earn risk-free returns from government securities, incentives to finance entrepreneurship diminish. When debt servicing consumes a large share of revenues, public investment in human capital declines. Growth slows, inequality widens, and fiscal space shrinks. This is precisely the critique advanced by Pakistani economist Asad Zaman, who writes: “The interest-based financial system necessarily leads to increasing inequality, since those who own capital receive returns without effort, while those who do not must work for wages. Over time, wealth accumulates in fewer hands, and the system becomes inherently exploitative. ” This is not a moral critique alone—it is a structural diagnosis. When returns are guaranteed to capital irrespective of real economic performance, risk is transferred downward while rewards are concentrated upward. The result is a persistent divergence between financial wealth and real productivity. Long before modern financial systems emerged, Ibn Khaldun articulated a similar insight in his analysis of political economy. He observed that excessive extraction by the state, combined with unproductive accumulation, ultimately undermines economic vitality. Wealth, in his framework, is generated through labour, enterprise, and circulation—not through accumulation detached from production. When economic activity becomes subordinated to rent-seeking, decline becomes inevitable. The modern debt system replicates precisely this dynamic, albeit in a more sophisticated form. Instead of overt taxation alone, extraction occurs through financial structures that privilege creditors over producers. Interest payments, sovereign bond markets, and financial intermediation create layers of claims on future output, constraining present economic activity. The result is a paradoxical economy: one in which financial wealth expands even as real economic capacity stagnates. The question then is whether an alternative is conceivable. A different model begins with a simple but transformative principle: capital must share risk with enterprise. Returns should be linked to productive outcomes, not guaranteed ex-ante. This shifts the financial system from debt-dominance to equity participation, from fixed claims to variable outcomes. Such a framework changes incentive fundamentally. Investors become partners rather than creditors. Capital flows toward viable projects rather than risk-free instruments. Entrepreneurs are not burdened with fixed repayment obligations that can destroy otherwise viable enterprises during downturns. Financial stability improves because leverage is reduced and risk is distributed rather than concentrated. Equally important is the treatment of economic distress. Systems built on rigid debt enforcement amplify crises. When borrowers cannot meet fixed obligations, defaults cascade through the system, leading to contraction and unemployment. By contrast, flexibility—through restructuring, deferred payments, or loss sharing preserves economic continuity. Modern policymakers have in practice, been forced to adopt such measures during crises, from sovereign debt restructuring to quantitative easing. Yet these remain corrective interventions within a fundamentally unchanged system. A coherent alternative would embed these principles into the structure of finance itself. Another critical dimension is the circulation of wealth. When capital remains concentrated, aggregate demand weakens, innovation slows, and social tensions rise. Broad-based participation in economic activity is not merely a social objective—it is a precondition for sustained growth. Financial systems that facilitate widespread access to capital, rather than restricting it through collateral-heavy lending, are more conducive to long-term development. Transparency and contractual clarity further reinforce this framework. Economic systems thrive where trust is institutionalised—through enforceable contracts, clear obligations, and accountability. Informality, by contrast, raises transaction costs and restricts access to finance. Pakistan’s policy debate has largely focused on symptomatic adjustments—tax rates, subsidies, and external financing. These are necessary but insufficient. The underlying structure of finance remains unaddressed. As long as growth is driven by debt expansion rather than productive investment, structural constraints will persist. The global debt overhang suggests that this is not a peripheral issue but a systemic one. An economic order that requires perpetual borrowing to sustain itself cannot remain stable indefinitely. Whether it is through inflation, financial crises, or gradual stagnation, the system will be forced to adjust. The real question is whether that adjustment will be managed or imposed. For Pakistan, the choice is particularly stark. Continuing along the current path implies deeper dependence on debt, greater vulnerability to external shocks, and further concentration of wealth. A shift toward risk-sharing finance, productive investment, and inclusive growth offers a more sustainable trajectory. This is not a utopian proposition. It is an economic necessity grounded in both historical insight and contemporary reality. The illusion that debt can indefinitely substitute for wealth creation is beginning to unravel. Nations that recognise this early and redesign their financial systems accordingly will be better positioned to achieve durable prosperity. Copyright Business Recorder, 2026

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