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 ?
Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
Statement-I is correct, but Statement-II is incorrect
Statement-I is incorrect, but Statement-II is correct
Answer is Right!
Answer is Wrong!
This question was previously asked in
UPSC IAS – 2024
Statement-II is correct. US Government debt is backed by the “full faith and credit” of the US government, which essentially means its ability to tax, borrow, and manage its economy, as well as its reputation and willingness to pay. It is not typically backed by specific physical assets like land or gold reserves.
While both statements are correct, Statement-II (the nature of the backing) does not explain Statement-I (the consequence of default). Default simply means failure to pay, regardless of what backs the debt. The type of backing might influence the severity of the default or the potential for recovery, but it doesn’t explain the fundamental event of non-payment.