If USA defaults on its debt, will the T bond holder get back his money
"The only party that can pay back a government bond is the government that issued it itself. In the case of Argentina, US vulture funds have won cases against it, but it has yet to pay.  The best one can do to collect is to sue in a jurisdiction that permits and hope to seize the defaulted government's assets held in such jurisdiction. One could encourage another state to go to war to collect, but this is highly unlikely since a state that doesn't repay is probably a poor state with nothing much to loot; besides, most modern governments do not loot the conquered anymore.  Such a specific eventuality hasn't happened in at least a lifetime, anyways.  It is highly unlikely that any nation would be foolish enough to challenge the United States considering its present military dominance. It is rare for nations with medium to large economies to spurn their government obligations for long with Argentina as the notable exception.  Even Russia became current when they spontaneously disavowed their government debt during the oil collapse of 1998. Countries with very small economies such as Zimbabwe are the only remaining nations that try to use their central banks to fund debt repayments if they even repay at all, but they quickly see that the destruction caused by hyperinflation neither helps with government debt nor excessive government expenditure. Nevertheless, it could be dangerous to assume that no nation would default on its debt for any period of time, and the effects upon countries with defaulted government debt show that it has far reaching negative consequences. If the US were to use its central bank to repay its government obligations, the law governing the Federal Reserve would have to be changed since it is currently mandated to ""maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices and moderate long-term interest rates."" The United States Treasury has no power over the Federal Reserve thus cannot force the Federal Reserve to betray its mandate by purchasing government debt. It should be noted that while Japan has a government debt twice its GDP, it also has a persistent slight deflation which has produced incredibly low interest rates, allowing it to finance government debt more easily, a situation the US does not enjoy. For now, the United States seems to be able to pay expenditures and finance at low interest rates.  At what ratio of government debt to GDP that would cause interest rates to climb thus put pressure on the US's ability to repay does not seem to be well known." There is no situation one can imagine in which the US defaults (beyond a day or three) on its obligations. The treasury can print money, and while it would be disastrous, 'monetizing' the debt would simply eliminate all outstanding debt at the risk of devaluing the dollar to hyperinflation levels.
"Its definitely not a stupid question. The average American has absolutely no idea how this process works. I know this might be annoying, but I'm answering without 100% certainty.   The Fed would increase the money supply by buying back government bonds. This increased demand for bonds would raise their price and therefore lower the interest return that they deliver. Since U.S. treasury bonds are considered to be the very safest possible investment, their rate is the ""risk free"" rate upon which all other rates are based. So if the government buys billions of these bonds, that much money ends up in the hands of whoever sold them. These sellers are the large financial organizations that hold all of our money (banks and large investment vehicles). Now, since bond rates are lower, they have an incentive to put that money somewhere else. It goes into stocks and investment in business ventures.   I'm less certain about how this turns into inflation that consumers will recognize. The short answer is that there is only a finite number of goods and services for us to buy. If the amount of money increases and there are still the same number of goods and services, the prices will increase slightly.   Your question about printing money to pay off debts is too complex for me to answer. I know that the inflation dynamic does play a role. It makes debts easier to pay off in the future than they seem right now. However, causing massive inflation to pay off debts brings a lot of other problems." This is a extremely complicated subject, but I assume you want a very simple answer (otherwise I'm not qualified to answer). The value of most currencies is closely tied to the economy of the county, so if China were to print a huge amount of yuan, then since the value of their economy has not really changed, the international currency markets would devalue the yuan to compensate. (This is rather like, if have shares in, say Apple, and they were to issue an extra billion shares, then the value of your shares would fall (by half), rather than for Apple to be suddenly be worth twice as much) Print too many notes and your currency basically becomes almost worthless, which is what happened to the Zimbabwean dollar. I like the idea of China skipping crate loads of actual yuan or dollars notes to America, but in practice, the borrowing is just a paper exercise, rather like an IOU. As to whether America owes Yuan or dollars, the answer is whatever has been agreed. Assuming the currencies are fairly stable, then since each country has more control over their own currency, it is natural for them to prefer their own currency. However, if America believes the value of the dollar will increase, they may prefer to pay back in Yuan (costing them less dollars), and if China believes the value of the dollar will decrease they may agree to that. "&gt; So you are saying down the road the FED might cancel out the amount of T-Bills and MBS they hold with the Treasury?  I'm saying they don't have to, for the US government will never have difficulty servicing its entirely USD-denominated debt. So if you think doing so would confuse/anger foreign nations, fine, don't do it.  I *would* however advise that the government stops issuing 10yr bonds in favour of funding itself off no more than say 28 day T-Bills. The reason being is that the latter's basically just creating a whole unneeded industry of speculators providing an entirely unneeded service of ""locking in"" interest rates for the government 10yrs at a time. Waste of time, waste of resources. The goverment shouldn't be subsidising that kind of activity." It's all about risk. In 1990, expressing the idea of the US defaulting on debt payments would result in you being labelled as a crank.  Yet in 2011, the President and Speaker of the House played chicken with the credit of the United States, and have a date to do it again in December 2011. Well, if someone who owes me money defaults, I lose the money he promised to pay me.    To me that would be a huge moral obstacle for declaring myself bankrupt.  I was raised in believing that you keep your promises. "In 2001, Argentina defaulted on it's debt, and started negotiating a ""haircut"" with it's debtors. As a result, a lot of the debtors sold the bonds they had a fire-sale prices, thinking better get some back than nothing.  One of the guys that bought those cheap bonds was Paul Singer AKA ""Mr. Vulture Hedge-fund"". I'll speculate here saying that Mr. Singer saw that the bond conditions gave him a way to force Argentina to pay the full value of the bonds notwithstanding it's default or negotiated haircut. Argentina did negotiate a haircut with about 97% of it's bond-holders. This meant that although they would lose out on some of the money, they would still get some back, and Argentina could work its way back to its feet eventually.   Mr. Singer and friends were the 3% that did not accept the haircut, and took the country to court to get 100% of the bond value back.  Now, the plot thickens. I don't understand if Mr. Singer knew this or not, but the bonds also had a post-2001 condition that said that no bond-holder would be worst-off than the highest bond deal Argentina offered anyone. Which basically means, if they pay Mr. Singer 100%, they have to pay everybody else 100%. Now, it was well established that Argentina could not pay 100%, and is not able to pay 100% of the debt, hence the 2001 default.   Meanwhile, Argentina was paying out the hair-cut bonds, but holding out on Mr. Singer and friends as they still didn't agree to pay 100%. The courts ruled that they could not do this, and had to pay everybody. Since Argentina cannot pay everybody 100%, it is defaulting on the debt." In principle, a default will have no effect on your bank account. But if the US's credit rating is downgraded, the knock-on effects might cause some more bank failures, and if the debt ceiling is still in place then the FDIC insurance might not be able to pay out immediately. &gt; Your preferred answer: It's not debt, it's magic. It never has to be paid back.  It's certainly not magic, but it is both a debt and an asset.     It adds a net amount of 0 to the balance sheet, while providing a little under 100 billion dollars of income to the US Treasury.  You don't seem to know what QE is. "This is a hard question to answer.  Government debt and mortgages are loosely related.  Banks typically use yields on government bonds to determine mortgage interest rates.  The banks must be able to get higher rates from the mortgage otherwise they would buy government bonds. Your question mentions default so I'm assuming a country has reneged on its promise to pay either the principal or interest on government bonds. The main thing to consider is ""Who does not get their money?"".  In other words, who does the government decide not to pay.  This is the important part.  The government will have some money so they could pay some bond holders.  They must decide who to shaft. For example, let's look at who holds Greek government debt.  Around 70% of Greek government debt is held outside Greece.  See table below.  The Greek government could decide to default only on the debt to foreign holders.  In that case the banks in France and Switzerland would take the loss on their bonds.  This could cause severe problems in France and Switzerland depending on the percentage of Greek bonds that make up the banks' assets.  Greek banks would still face losses, however, since the price of their Greek bond holdings would drop sharply when the government defaults.  Interestingly, the losses for the Greek banks may be smaller than the losses faced by the French and Swiss banks.  This is usually the favored option chosen by government since the French and Swiss don't vote in Greece. Yields on Greek government bonds would rise dramatically.  If your Greek mortgage is an adjustable rate mortgage then you could see some big adjustments upward.  If you live in France or Switzerland then the bank that owns your mortgage may go under if Greece defaults.  During liquidation the bank will sell their assets which includes mortgages and you will probably not notice any difference in your mortgage. As I stated earlier: this is a hard question to answer since the two financial instruments involved (bonds and mortgages) are similar but may or may not be related." "Sovereigns cannot go bankrupt. Basically, when a sovereign government (this includes nations and US States, probably political subdivisions in other countries as well) becomes insolvent, they default.  Sovereigns with the ability to issue new currency have the option to do so because it is politically expedient. Sovereigns in default will negotiate with creditor committees to reduce payments. Creditors with debt backed by the ""full faith and credit"" of the sovereign are generally first in line. Creditors with debt secured by revenue may be entitled to the underlying assets that provide the revenue. The value of your money in the bank in a deposit account may be at risk due to currency devaluation or bank failure. A default by a major country would likely lock up the credit markets, and you may see yourself in a situation where money market accounts actually fall in value." Typically the debt is held by individuals, corporations and investment funds, not by other countries. In cases where substantial amounts are held by other countries, those countries are typically not in debt themselves (e.g. China has huge holdings of US Treasuries). If the debts were all cancelled, then the holders of the debt (as listed above) would lose out badly and the knock-on effects on the economy would be substantial. Also, governments that default tend to find it harder to borrow money again in the future. The issuer pays (negative money in this case) to the holder.  The person you sold your borrowed bond to gets this (negative) amount.  The person who you lent you the bond is eligible for that (negative) payment, they were the original holder of the bond.  When you return the bond you thus have to compensate the original holder.  Now turn around the cash flows and you're there. The new holder pays the issuer, the original holder pays you. The picture talks is about assets on the Fed's balance sheet, which is very different than US government debt. Nor is there anything in the picture about corporate bottom lines, just US equities.   The implication of the picture is that the Fed's QE program is propping up US equity prices, and it is not a comment on the US debt or corporate earnings. You're reading things that simply aren't there. As I'm sure you are reading in Hull's classic, the basic valuation of bonds depends on the chance of entity defaulting on those bonds.  Let's start with just looking at the US.  The United States has a big advantage over corporations in issuing debt as it also prints the same currency that the debt is denominated in.  This makes it much easier not to default on your debt as you can always print more money to pay it.  Printing too much currency would cause inflation lowering the value of debt, but this would also lower the value of US corporate debt as well.  So you can think of even the highest rated corporate bonds as having the same rate as government debt plus a little extra due to the additional default risk of the corporation. The situation with other AA rated governments is more complicated.  Most of those governments have debt denominated in their local currency as well so it may seem like they should all have similar rates.  However, some governments have higher and some actually have lower rates than the United States.  Now, as above, some of the difference is due to the possible need of printing too much currency to cover the debt in crisis and now that we have more than one country to invest in the extra risk of international money flowing out of the country's bonds. However, the bigger difference between AA governments rates depends more on money flow, central banks and regulation.  Bonds are still mostly freely traded instruments that respond to supply and demand, but this supply and demand is heavily influenced by governments.  Central banks buy up large portions of the debt raising demand and lowering rates.  Regulators force banks to hold a certain amount of treasuries perhaps inflating demand. Finally, to answer your question the United States has some interesting advantages partially just due to its long history of stability, controlled inflation and large economy making treasuries valuable as one of the lowest risk investments.  So its rates are generally on the low end, but government manipulation can still mean that it is not necessarily the lowest. I always find this funny. How can government bonds be in attractive and currency be attractive?  With monetary policy America guarantees that it can't default on debt. The only thing that can happen which breaks this is if the government prints itself out of debt. In which case not only will you bonds be worthless but so will your cash.  So to all the investors with boats of cash, you are trading one problem for the same problem. The only difference is you can hold the second problem in your hands.  Fools.