Home > Politics and the economy > Handbag economics: The ideology of austerity

Handbag economics: The ideology of austerity

from Mary Mellor

Handbag economics is the common sense of our age.  Public sectors are like households, they must live within their means, balance their books, cut their coat according to their cloth. Britain is to face more years of austerity, not because it is in recession, but in pursuit of the handbag ideal.

According to handbag economics there is only one breadwinner in the economy, the private sector. Only the private sector can determine the size of the public household budget. In this gendered analogy, the public-housewife must not ask for more house-keeping, or borrow more, to make ends meet. Most emphatically, the public-housewife must not set up a printing press in the back room to create her own money.

There is a shed, though, at the end of the garden beyond her reach.  This shed has a printing press and every time the private sector-breadwinner runs out of funds he asks the gardener-central banker to crank it up. Despite this, handbag economics denies that the public household should have any access to this money, even though it has a monopoly on producing coin and its garden shed has the monopoly on producing banknotes. Handbag economics, in any case, has its own money supply, debt.

New money as debt is created through the banking system. Anyone with half an idea can ask to have new numbers credited to their bank account on which they can draw. Preferably though, it should be a big idea like betting on the value of sterling, buying a chemist chain, or smaller bets like buying a football club. Mortgages are another great way to increase money supply through debt, particularly if prices are rising and houses are changing hands quickly.

Then there are the side bets such as insuring debt or buying up a bundle of debts as an asset. Good times happen when everyone feasts on the new debt, particularly the financial sector, as millions are lent to hedge funds to speculate and private equity funds to accumulate. These then pay themselves huge salaries and bonuses, forgetting that it is only a form of money laundering that can turn borrowed new money into seeming new wealth.

Really it doesn’t matter for what the money is lent because banks do not create debt money in their own name. The new debt created money is all designated in the insignia of the public household, which will ultimately have to honour the floods of money circulating around. It also doesn’t matter if the debts go toxic because the gardener-central banker will buy them up with new public money.

Making debt the basis of the money supply means that it all has to be repaid with interest. Every borrower must find more money than they were lent. This is easy when an expanding loan book is creating an expanding money supply. However, if doubt enters the system and borrowers start to disappear, and lenders become cautious about lending, the money supply will quickly contract.

This is when the breadwinner, temporarily humbled, goes to get a sub from the missus. This means he might have to treat her with some respect, even perhaps feel a bit foolish for having spent like a drunken sailor. To avoid this, he accuses his wife of letting him down, robbing him when he wasn’t looking, asking for too much. He demands the whole family goes on quarter rations until he is paid back for the money she has spent rescuing him.

The private sector-breadwinner can behave like this because he doesn’t care much for his public household and never wanted to marry anyway. In any case, over the water he has other households who will ask for even less housekeeping, while he pleads poverty at home. Meanwhile, the public-housewife tries to keep body and soul together, mending the roof, feeding the hungry children, caring for the old and sick, dealing with all the people for whom the breadwinner cannot find jobs.

Because her income from the breadwinner is unpredictable, the public-housewife  does spend new money, despite the restrictions of handbag economics. This, the gardener gives her, not wanting to see her starve.  As the gardener-central banker controls the public money machine there is no necessity to pay the money back. However, the gardener, scared the breadwinner would be angry, records the money as a loan which is securitised as an asset and sold on the money market.  The breadwinner is delighted as this means he doesn’t have to give the public household any more money and can even demand back the money that has been ‘borrowed’.

For a long time the public-housewife has not complained about her treatment. Like many bullied housewives she has low self-esteem. She doesn’t think she is much good at anything, hasn’t got a head for business. She even justifies in public everything the breadwinner does, as she doesn’t want to be disloyal or undermine his businesses.  She never asks what he is spending the money on and if it is worthwhile. She just tries to look after the children and keep the house going as best she can.

Then one day she wakes up. She demands to know what the breadwinner has done with all that money. Why has he landed the family in debt and why is she being made responsible for it? Why do the children have to go without? She doesn’t have to wait for the breadwinner to borrow money, speculate with it, then grudgingly give her a few pounds. She doesn’t have to borrow from the breadwinner or the gardener. The gardener-central banker is part of the public household and could pay her household expenses directly.

However, she is aware that no-one will respect her money if it becomes too plentiful, so she spends it carefully asking the household what their priorities are (something the breadwinner never did). Then she asks that a portion of the money be returned each year to reduce the amount in circulation. However, unlike the debt-based money supply there is no obligation to return all the money, and certainly not more than was created. Unlike the breadwinner, she realises that is impossible. According to handbag economics she is in deficit, but the money she does not reclaim as tax or payment is now free to circulate.

Finally she demands a divorce. In separating the assets of the household she reclaims the insignia of the money as a public heritage.  Banks may no longer create new money with that insignia. If they want to make loans they must either transfer savings of her existing money or create their own money and honour it themselves.

  1. December 12, 2013 at 3:05 pm

    These histories are rarely seen by the severely-deceived people!

  2. December 12, 2013 at 3:18 pm

    “Public sectors are like households” is a fallacy common in today’s rhetoric. This is the Fallacy of Inconsistent Comparison. In order for the analogy to hold true, two different definitions of “deficit” have to be used, one for the public sector and one for households, and then the two are compared as if they are the same thing. In this analogy, a deficit for the public sector is defined as “not going into debt”; while a deficit for the household sector is defined as “paying debt obligations when the payments come due”. Without this inconsistent comparison, the analogy doesn’t hold up.

    This isn’t meant to excuse deficits, it just means that using the analogy to compare households to the government in terms of deficits doesn’t hold up logically.

    • F. Beard
      December 12, 2013 at 3:44 pm

      This isn’t meant to excuse deficits, Jerry Wyant

      Deficits by the monetary sovereign should be the norm, not the exception. Otoh, fiat should only be legal tender* for government debts, not private ones. That should optimize the fiat creation rate since if the monetary sovereign overspends relative to taxation and the real growth rate then only the monetary sovereign and its payees should suffer; i.e. the stealth inflation tax is abolished.

      *But voluntarily useable for private debts too.

  3. December 12, 2013 at 3:22 pm

    I put the “not” in the wrong place. I meant to say that a deficit in the public sector is defined as “going into debt” while a deficit in the household sector is defined as “not paying debt obligations when the payments come due”.

  4. F. Beard
    December 12, 2013 at 3:23 pm

    Banks may no longer create new money with that insignia. If they want to make loans they must either transfer savings of her existing money or create their own money and honour it themselves. Mary Mellor

    Exactly! That’s what ethical money creation is about. Or if the banks (but not a central bank!) are still allowed to extend credit then they and their entirely voluntary depositors and creditors must assume ALL the risk thereof.

    The separation of State and private money creation was implied nearly 2000 years in Matthew 22:16-22 (“Render to Caesar …”). It’s too bad we have not yet learned that lesson or if we ever knew it to have forgotten it. Such is the price of Biblical ignorance.

  5. December 14, 2013 at 7:03 pm

    Wonderful. Metaphors like this are absolutely the best way to get grounded in the complexities.

  6. December 20, 2013 at 1:27 am

    Awesome article!

    One could further emphasise money as flow vs. money as quantity. Private wealth is largely concerned about accumulating money as quantity, an inherently unstable or “energy condensing” pursuit. The stock market values companies according to their ability to push money uphill to investors and out of the real economy.

    Real people act according to money as flow. We work contently when money flows in our direction and become distressed when disconnected from the flow. Our macro problems are largely due to broken circuits of money flow, also known as corporations and assets, and monetary easing is a poor substitute for this broken surplus recycling.

    The sooner economics becomes a science of graphs and flow, instead of scalar aggregates, the more relevant and useful it will be.

  7. axdouglas
    January 17, 2015 at 10:19 am

    Good debunking until the last two sentences. They suffer from the ‘sovereign money illusion’, itself debunked here: http://www.3spoken.co.uk/2014/11/the-sovereign-money-illusion.html?m=1

    Also: ‘She doesn’t have to wait for the breadwinner to borrow money, speculate with it, then grudgingly give her a few pounds.’ She doesn’t do that now. Her spending creates bank reserves directly; she then issues bonds to drain reserves so that the ‘gardener’ can meet his interest rate ttargets. Set the rate at zero and there would be no need.

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