Quantitative monetary policy at the zero interest bound should be understood as a “bond market carry trade.” Net interest earnings on the front end of the monetary carry trade should be retained—to guard against the central bank having to create reserves (or borrow) to pay interest on reserves or managed liabilities on the back end, and to show that interest expenses are paid for in large part by earnings from the front end. In the United States, the Federal Reserve balance sheet reflects the front end of a carry trade in that by the end of 2014. The Fed has long asserted independent authority to retain net interest income thought necessary as surplus capital against prospective exposures on its balance sheet. The Fed recognizes that the retention of net interest earnings to build up surplus capital incurs no resource cost for the Treasury or taxpayers. Yet, the Fed has chosen not to build up surplus capital against the carry trade exposure and risk on its balance sheet, jeopardizing the operational credibility of monetary policy for price stability.
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The appearance of the Bitcoin system, which offers a radically new type of asset that is intended to be used not only as an investment but also as a medium of exchange—and whose operation lies entirely outside the domain of the Federal Reserve—is an extremely interesting recent development in the area of monetary institutions. As matters stand now, the quantitative magnitude of Bitcoin is extremely small in comparison with traditional assets. It must be said, nevertheless, that the development of the system reflects an extremely impressive intellectual achievement.
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