Yuan Oil Contract, page-62

"The selling of the Fed's bond portfolio shouldn't have any impact on the US dollar beyond any impact that may follow if long term interest rates rise because of the increased supply of bonds.

The Fed wont just sit on the dollars it receives for the bonds it sells. It will release reserve deposits back to the US clearing banks. If you want to watch this taking place, watch the changes in the Fed balance sheet over time."

I have to say that I do respect Timber's opinions, but here I think that he is somehow a bit confused because I think, and I must advise that I have been drinking a bit, the entity that gives the deposits back is Treasury and not the Fed.

Conventional wisdom is that:

"If the Fed buys bonds in the open market, it increases the money supply in the economy by swapping out bonds in exchange for cash to the general public. Conversely, if the Fed sells bonds, it decreases the money supply by removing cash from the economy in exchange for bonds. Therefore, OMO has a direct effect on money supply. OMO also affects interest rates because if the Fed buys bonds, prices are pushed higher and interest rates decrease; if the Fed sells bonds, it pushes prices down and rates increase."

However, and it seems that there is an however for everything:

"deficits increase bank reserves and sustained deficits will result in excess reserve positions unless countervailing action is taken. Excess reserves put downward pressure on the fed funds rate. The Fed can sell government bonds (open market sale) to relieve that pressure, or the Treasury can sell new bonds. In either case, the operational impact is to substitute Treasuries for excess reserves (it is the opposite of QE). And note that if no such action is taken, budget deficits PUSH INTEREST RATES DOWN, not up."

Sorry goldbugs, but the idea that deficits supposedly pushes up interest rates paid by government, which increases debt service costs, which accelerates the growth of budget deficits and raises interest rates more leading to a vicious cycle that increases the debt-to-GDP ratio until the US becomes Greece, although possible seems according to the above to be a little unrealistic unless, of course, the Fed falls a sleep at the wheels