>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...
The Fed buys or sells securities that are held by banks and other primary dealers. You're right that the supply of Treasuries is decreasing (though maybe not forever), which would complicate monetary policy (just what would the Fed buy and sell? and for that matter, where will nervous investors park their cash safely if they don't have T-bills and notes in size?). But regardless of the trend, dealers still have gobs of Treasuries on their books, so it's not a problem yet. There are trillions in the hands of the public, and when the Fed buys or sells, it's in lots of a few billion.
Doug