Yesterday, the Federal Reserve did something it’s never done before: purchasing exchange traded funds (ETFs) that are invested in corporate bonds. As a brand new program, this has generated a lot of confusion on behalf of the public. Why is the Fed buying bonds? Who is the Fed helping by buying corporate bond ETFs?
I’ll try to answer these questions (and more) in this article.
A recent proposal out of Iceland has been making the waves around economics blogosphere. In it, Frosti Sigurjonsson critiques the current fractional-reserve banking system and proposes instead a system he calls “Sovereign Money”. But what is “sovereign money”, how is it different from the current system, and how will it work? In this post I’ll first explain how the current system works and the problems it has from an Austrian perspective, then go through the sovereign money proposal to see how it solves any of the short-comings of the current system.
How is money created in the current system?
Before we can analyze the sovereign money proposal, we need to understand how the current system operates. This can be demonstrated in a 4 step process. But first understand that a central bank (like the Bank of Canada or the Federal Reserve) is a lot like any other bank: it offers deposit accounts and loans to clients. The difference is that you can only become a customer of the central bank by invitation only.