What happens if investors and institutions around the world lose faith in the U.S. Governments’ ability to pay its obligations, and stop purchasing U.S. Treasury Bonds?
Under normal circumstances, the Government can create debt, and then move a portion of this debt into the future by selling Treasury Bonds to the citizens. It's borrowing from the future because eventually that debt must be repaid. When uncertainty exists, people flock to cash. They convert all of their long-term debt into liquid cash, and that reduces the immediate purchasing power of the represented dollar. Every attempt is made to reverse this trend, such as Nixon's Wage and Price controls, or President Roosevelt's gold seizure. But if the people can't be persuaded to put their money back into long term debt, then the Federal Reserve is forced to "monetize" this debt, and either print the money or default. Of course, the only politically sound policy is to create more money. This means the devaluation of all existing Federal Reserve Notes. This is how the Federal Government will repay the Federal Debt.They will pay it with dollars worth substantially less than the dollars that they borrowed in the first place.