that is sent to the government, in exchange for those bonds, is shredded (the bank account is lowered without any other bank account being increased) and the opposite occurs when the bonds mature. It looks just like taxation and spending, but the decision to do so is voluntary by the holder of the dollar. Since the interest rate was set so high, the owners of the bonds would have huge ammounts of dollars after the bonds mature, which would allow them to buy everything in the store (the economy) plus more. If there isn't more, then you would have inflation as too many dollars chase not enough goods (high aggregate demand). Martin, since nongovernment net financial assets created by the the deficit (currency issuance) must by law be offset with tsys (debt issuance), all deficit expenditure is immediately transferred to tsys at the macro level. Conceptually, the government must issue the tsys and the Fed must auction them off before the Fed can put the reserves in the Treasury account. (This is "conceptually." How it actually occurs is somewhat different in practice. See here .) But principle is that deficit expenditure creates nongovernment net financial assets that are saved a tsys. The "national debt" is the accounting record of cumulative saving of nongovernment NFA in tsys. The impact of the deficit expenditure on the economy is through the flow it creates. Martin Reply: December 9th, 2010 at 2:06 pm Help me out with the law that currency issuance must be