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?
(a). Both Statement-I and Statement-II are correct and Statement-II explains Statement-I
(b). Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I
(c). Statement-I is correct, but Statement-II is incorrect
(d). Statement-I is incorrect, but Statement-II is correct
Explanation:
Statement-I: A default on US debt would mean the US government fails to fulfill its obligations to bondholders. This could involve missing interest payments or not repaying the principal amount at maturity. In such a scenario, bondholders wouldn't be able to readily access their money.
Statement-II: The US government debt isn't directly backed by physical assets like gold or oil. Instead, it relies on the US government's ability to generate future tax revenue and its reputation for honoring its debts.
Why Statement-II Doesn't Explain Statement-I Directly
While the lack of hard asset backing is a factor, it doesn't inherently lead to default. The US has a long history of paying its debts, and its strong economy inspires confidence in its ability to continue doing so. However, a combination of factors, such as excessive spending, economic downturns, or political instability, could lead the US to prioritize other needs over debt repayment, triggering a default.
The answer is: (b) Both Statement-I and Statement-II are correct, but Statement-II does not explain Statement-I