Can the PP perform well when two of its asset classes are falling

[stone]

D1984, your description of the "liquidity glut" was exactly what I was trying to describe. When you talk about Benanke hypothetically saying "we have a paper shredder or its electronic equivalent", my point was that the Fed doesn't really have any such effective paper shredder. I don't think the market rate that the Fed would get for its asset holdings would reel in enough bank reserves to get a sufficient liquidity squeeze to push short term treasury rates up much above inflation. The government does have such a paper shredder it's called taxation but the Fed doesn't have it and the government would have to both have the will to tax that much and also the will and where-with-all to realize that any capable tax would have to be directed at people who could get their hands on all of that liquidity to pay the tax. Ron Paul putting a sales tax on people's grocery bills would never scratch the surface even if he were (very unlikely) to impose such a large sales tax that it shut the economy down or (even more unlikely) to have the perfect Laffer curve revealed to him in a vision.

About money supply names, I was going by http://en.wikipedia.org/wiki/Money_supply#United_States (that august source ) :
# M0: The total of all physical currency, plus accounts at the central bank that can be exchanged for physical currency.
# M1: The total of all physical currency part of bank reserves + the amount in demand accounts ("checking" or "current" accounts).

My understanding was that the vast bulk of M0 (base money) was bank reserves and that they are the modern electronic equivalent of paper folding cash as carried in money bags and stored in vaults etc. They exist physically as entries in the Fed's computer as an entry for each commercial bank (just so that mouse clicks can do the work previously done by people loading money bags onto trucks etc).

[stone]

D1984, I wasn't saying that running a large trade surplus means that a country is compelled to have higher short term treasury rates. Like I said with our type of monetary system I think short term treasury rates can always be zero if the central bank chooses to let them fall to that. Any rate above zero is a something generated on purpose by the Fed as a policy decision. Rather I was trying to say that such a trade surplus might make it  feasible for the government to tax enough to fund all of the interest payments despite the huge level of outstanding debt the government now has.
Basically if a country just had its domestic economy and had a huge debt (held by people and institutions who used interest payments to buy more treasuries) then high interest rates would have to be funded either by escalating  the size of the debt or taxing the people who held most of the treasuries (no chance of that on the horizon in the US or UK). Any attempt to fund it by taxing the "little people" would just cause a collapse in demand and so a collapse in taxable sales and profits etc. By contrast with a trade surplus, even if (after tax) the "little people" couldn't afford to buy enough to provide demand to sustain jobs and keep the economy going, the export sales would keep the factories running and the tax revenues flowing.