Consider the following statements :

Statement-I: If the United States of America (USA) were to default on its debt, holders of US Treasury Bonds will not be able to exercise their claims to receive payment.

Statement-II: The USA Government debt is not backed by any hard assets, but only by the faith of the Government.

Which one of the following is correct in respect of the above statements?

The correct answer is Option 1.

Key Points

• In the event of a default, the U.S. government would fail to meet its debt obligations.
  • Holders of U.S. Treasury bonds have claims on the government to be paid principal and interest.
  • However, in the event of a default, they might not be able to exercise these claims immediately, since the government wouldn't have the funds to meet its obligations, leading to bondholders being denied their claims. Hence, Statement-I is correct.
• U.S. government debt (like U.S. Treasury bonds) is not directly backed by hard assets like gold or real estate.
  • Instead, it is backed by the "full faith and credit" of the U.S. government.
  • This means the U.S. government promises to repay the debt based on its ability to tax, borrow, and print money.
  • It is true that there are no hard assets backing this debt—just the government's ability to generate revenue. Hence, Statement-II is correct.
• Statement-II highlights that U.S. government debt is not backed by any tangible collateral (like gold reserves or assets) but rather by trust in the government's financial system.
  • Since there is no collateral to fall back on, the debt relies solely on the government's ability to repay, and if that ability collapses (as it would in a default), bondholders are left without any physical recourse for repayment.