cash. It is as though the old cash were destroyed and new cash printed in the sense that there is no connection of the old cash with the banking system anymore. If it is used again, it becomes "new cash" without any trace of its previous history attached to it. Federal Treasury spending (to fund the private sector) adds reserves to the Federal Reserve banks. Taxes are a way for the Federal Treasury to recall some of those reserves, thereby cooling the private sector economy. Exactly. The second part is that issuance of Treasury securities to offset the deficit with "debt" simply drains reserves that the deficit created in order to allow the Fed to hit it target rate. The Fed than adjusts the amount of reserves using open market operations (OMO) to hit the target rate (the FFR) in the overnight market. Government adds to its budget deficit through disbursements to increase nongovernment net financial assets and cuts its deficit through taxation to decrease nongovernment net financial asset. According to Abba Lerner's principles of functional finance, the only reason it should do either is to manage aggregate demand relative to the capacity of the supply side of the economy to absorb it, thereby stabilizing growth (investment), supporting the public's desire to save (not spend income), and maintaining full employment along with price stability. chiefly through targeted fiscal policy. Debt issuance is purely a monetary operation having to do with interest rate setting. It is not a fiscal operation because