The Surplus's effect on money supply

[James Baird]

> 
> Credit money is created by private actors - e.g., a
> bank making a 
> loan. Central banks can provide the money to
> validate such private 
> credit creation (which they do in normal times), or
> they can refuse 
> (as they do when they're tightening). If they
> refuse, the system runs 
> short of liquidity & seizes up.
> 

OK, but this is what I don't understand: the mechanism
by which the Fed is supposed to inject or withdraw
money into the system is by buying and selling
treasury securities.  But if the Treasury itself is
running a surplus, isn't the supply of securities (and
thus of money) going to decrease no matter what the
Fed does?  I guess I just don't understand the
relationship between the Fed and the Treasury...

Jim Baird 

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