The dollar economy is a closed system. Dollars cannot be converted. They are always exchanged. So where do they go and what do people do with them? A paper doll

The dollar economy is a closed system. Dollars cannot be converted. They are always exchanged. So where do they go and what do people do with them? A paper dollar is just a receipt for a liability entry in the US treasury - wherever you are in the world. For interest rates to go up, bond prices have to go down. If the Fed just buys up bonds that drop below par with new dollars, how can interest rates go up?