When a corporation defaults, the bondholders are paid ahead of the shareholders.

But if a person buys Treasury bonds, and the US government defaults, will the lender be paid back? By whom? You cannot liquidate the government and pay back the lender as you would liquidate a company to pay off the bond holder.

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    "default" by definition means not paying back obligations. Which exactly obligations won't be paid is a guess - and yours as good as mine. – littleadv Feb 3 '14 at 22:27
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    This question appears to be off-topic because you are asking an open-ended, hypothetical question: “What if ______ happened?”. Refer to the help center. – Chris W. Rea Feb 4 '14 at 1:23

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.

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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.

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  • Amplifying this (good) answer: The U.S. has sufficient revenue to pay obligations, so the choice to pay or default on debt obligations is just that, a choice, and a political choice, and thus embroiled in opinion. But how to manage that risk is an interesting topic. – ChuckCottrill Feb 6 '14 at 1:53

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