from Treasury disbursements get drained from the interbank market and stored (sequestered) in tsy's, allowing the Fed to hit its target rate. When the tsy's mature, then they are converted to back to reserves, and the debt is rolled over, further sequestering them. The only way that reserves once created through Treasury disbursement "disappear" is by withdrawing them from the system through taxation. Congress does this though the budget, and the Treasury/Fed carry out this policy, as they do with disbursements, only in the opposite direction. Tom Hickey Reply: August 9th, 2010 at 12:00 am Steve, Warren's point in saying that the cash paid in taxes gets shredded is that after the taxpayers' accounts are credited and their tax liabilities wiped out, then the cash has served it purpose. It does neither gets saved in a vault for future spending nor is it used to pay back debts, as many presume. Government funds itself with currency issuance, not taxes or borrowing, in a fiat system. How do maturing tsy's get paid off? The reserves that were used to purchase the tsy securities just get credited back to a deposit account or bank reserve account, and the debt "just disappears" because it never actually existed as debt. It's just savings being transferred back to a demand deposit. For example, suppose you have some funds at an interest rate that is less than a CD, you can put the money into. You therefore move the funds into the CD. Then when the