bank can exogenously set the money supply. Then the rising income from the deficit spending pushes up money demand and this squeezes interest rates up to clear the money market. This is the Bastard Keynesian approach to financial crowding out. Please read my blog -- Those bad Keynesians are to blame -- for more discussion on this point. From a macroeconomic flow of funds perspective, the funds (net financial assets in the form of reserves) that are the source of the capacity to purchase the public debt in the first place come from net government spending. Its what astute financial market players call "a wash". The funds used to buy the government bonds come from the government! There is just an exchange of bank reserves for bonds -- and so there is no net change in financial assets involved. There is also no finite pool of saving that is competed for. Loans create deposits so any credit-worthy customer can typically get funds. Reserves to support these loans are added later -- that is, loans are never constrained in an aggregate sense by a "lack of reserves". A basic fact that any ECO101 Macroeconomics student has to understand is that saving grows with income (being the macro residual left after consumption decisions have been taken). In 1931, as part of his demolition of the then British Treasury View (that eschewed budget deficits), Richard Kahn, who had studied under Keynes noted that total saving is a function of national income and so