The scary thing about this is that it also works in the real world, and is actually one of the more likely outcome of the ongoing debt crisis. To see how this works, let's use a very extreme example: President Obama tells the U.S. Bureau of Engraving and Printing to design a new 1-million dollar banknote (with his face on it), then lets print 300 million of these, and sends one of them to each citizen of the United States. As most Americans with debt have a debt below 1 million dollars, they would all immediately be able to repay all their debt. And a good part of the money would flow back to the local and federal government, where it could be used to pay all government debt as well. With one fell strike the debt crisis in the US would be over (the EU could do the same for theirs).
There are just some problems with that solution: It would result in a huge jump in inflation. If everybody is a millionaire, then a million isn't much money, and doesn't buy you much. And for every borrower having his debt wiped out, there is a lender having his savings wiped out. Basically the people who spent more than they could afford (which includes the government) are rewarded, and the people who did the prudent thing and saved are punished. Furthermore nobody will be willing to lend money to somebody else any more, as after such a precedence nobody could be sure any more that it wouldn't happen again. If the US wanted to borrow more money from the Chinese, the Chinese would insist that the debt would be in Yuan, and not in dollars, so the US can't devalue their debt away in the future.
But while the 1-million dollar Obama banknote isn't likely, a more stealthy version of the same solution is very likely. It even has already started, and been given a positive sounding name: Quantitative Easing. To put this into perspective, in the most recent US round of quantitative easing, nicknamed "QE2", the Federal Reserve created $600 billion of money out of nothing, and used it to pay back government debt, by buying treasury bonds. That is only $2,000 per US citizen, and thus doesn't create that much inflation as $1 million per person would. But the basic principle is exactly the same: More money flows into the economy, allowing people with debt to pay back some of it, while reducing the value and interest rates on savings.
The man who controls the machine which prints the money can never go bankrupt. But he can destroy the value of the currency and thus help debtors and punish savers. And if you think you aren't affected because you didn't lend money to anyone, have a look at your pension scheme: It is a promise to pay you a fixed amount of money in the future. If that fixed amount isn't worth much, your retirement might look a lot different than you imagined.