[Solved] Consider the following statements: Statement-1: 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-1: 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?

Q41. Consider the following statements:

Statement-1:

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-1:

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?

1. Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
2. Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
3. Statement-I is correct, but Statement-II is incorrect
4. Statement-I is incorrect, but Statement-II is correct

Answer: 1

• As the national debt has soared, the U.S. Treasury Department has had to borrow more money to pay for government spending by revoking the Debt ceiling.

• The debt ceiling sets the maximum amount of outstanding federal debt the U.S. government can incur.

• Raising or suspending the debt ceiling by US Congress becomes necessary when the government needs to borrow more money to pay its debts than is federally authorized.

• If Congress fails to lift the debt ceiling before the due date when the Treasury will run out of cash—the federal government will not be able to pay its obligations. Further, 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. Hence statement-I is correct.

• Further, the Currencies like US dollars are fiat currency.

• Fiat money is a government-issued currency that is not backed by a physical commodity, such as gold or silver, but rather by the government that issued it.

• The value of fiat money is derived from the relationship between supply and demand and the stability of the issuing government, rather than the worth of a commodity backing it. Furthermore, if people lose faith in a nation’s currency, the money will no longer hold value.

• So, Treasury Bonds issued by the US government are not backed by any hard assets but based on only faith of the government and if the government fails to repay the debt taken, then bond holders would not have the right to exercise their claims to receive payment.

• Hence statement- II is correct and it is the correct explanation of statement-I.