[Copernicus]

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The money supply can shrink. Thats what the fed does.

<font color="red"> Youre right...I should have said it cant easily shrink. Tinkering with M is extremely complex and has indirect results that arent easily controlled. That is why the Fed focus is more on interest rates than on M.

The three methods of controlling money supply in the US are to increase the Feds reserve requirements...not frequently done; by increasing interest rates, which dampens borrowing, leaving more in reserves...but slows the economy even further; and by issuing Treasuries (which shrinks money supply) or retiring Treasuries (which increases money supply).

In China the central bank is the Peoples Bank of China, which is modeled after the Fed, and functions in pretty much the same way. So to shrink their money supply they have to increase the Peoples Bank Reserve requirements, increase interest rate which exacerbates the debt problem its trying to solve, or sell US treasuries which, in large quantity again increases interest rates worldwide. </font>

Going back to Howards question. The government doesnt necessarily issue T-Bills in proportion to its debt (in fact it doesnt). China buying T-Bills is just there way of getting rid of their surplus of US dollars (at the same time increasing demand in USD and keeping the exchange rate low).

In fact the government often jsut tacks things on to debt without expecting current taxpayers to compensate for them. Thats the problem. Would the chinese not buying USD, make our debt larger? Not directly (AFAIK). <font color="red"> Im not sure what you mean by the first sentence about "tacking things on to debt without.....". It is correct that China buying or selling USD doesnt impact debt, though I dont know how thats relevant here. Debt is created by spending more than tax revenues. That spending needs to be paid for, and the main way to pay for it is to issue new Treasuries, which is the way its "tacked on to debt"</font>

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