Why can’t a household be more like a bank?

The short answer to this question is of course that householders don’t issue their own money.

But banks do.

So perhaps we should be complaining less about the household analogy that is the bugbear of a proper understanding of how the economy works  – and suggesting another more fitting analogy.

A government with a sovereign currency is more like a bank.

There are other similarities – issuing money is good for business, indeed is the business.

Unlike a household, a bank doesn’t put money away for a rainy day into savings – it invests. Just as a competent government ought.

And a bank doesn’t want to be in surplus with extra money sloshing around in its coffers. Good business relies on the bank being in deficit.

So the government is like a bank.

Perhaps this analogy might yet get people thinking about banks – as well as about the government and the economy!

10 thoughts on “Why can’t a household be more like a bank?”

    1. Thanks, Charles. That’s also why I recoil when they say UK PLC – it should more accurately be UK Bank PLC!

  1. You really can’t explain this too many times in my opinion, and the more different ways you manage to do, it the better. I’ve lived with the “household budget” analogy for over 70 years, so cracking it apart has been no easy task. Thanks to all on this site and on Tax Research UK who have helped (and are still helping) me on my way.
    Do you have any kind of Q&A section where people can ask niggly things that are still bugbears, or is that too basic?

      1. Thanks for offering – hope you don’t regret it. So here goes:
        Mariana Mazzucato has said “Today more than $2 trillion of idle cash is sitting on the books of public companies in the U.S. rather than being invested, with a further $2 trillion in Europe”.
        Does this simply mean the companies can make more money for their shareholders and executives by cutting costs, buying their own shares and paying out higher dividends? Do they never have to invest in anything useful?
        And do these transactions contribute to what we call our GDP?

        1. Well here goes.
          Whilst the world economy is flatlining companies don’t see much or even any unmet demand that makes it worth investing their idle cash. And yes, they think they can make money for their shareholders through share buybacks and, as long as the shareholders are happy, they don’t have to invest in anything useful.
          And I don’t know for sure, but I doubt these transactions are part of GDP.

          1. Here’s another of jan b’s “niggly” questions – is all that money that various parties have apparently “stashed away” in tax havens just left as a massive positive balance on the books of some bank or financial institution based in that tax haven – or do those institutions do something with it? Does it somehow reappear in say the UK, or USA, fuelling the consumer credit bubble? But then there’s no need for that, as the banks in the UK and USA can just create any amount of credit anyway? Maybe the tax haven banks buy UK or US government bonds? That would all be a bit circuitous – avoid tax but lend the money to the government! Maybe they buy stocks and shares, or derivatives, and speculate? But are the likes of Apple happy to have all that money being gambled with, rather than sent back home (minus a bit of corporation tax)?

            I can’t develop any sort of feel for how this works – maybe I should read a book on it – any suggestions?

          2. For the book – see http://www.progressivepulse.org/category/book-of-the-month/ May 2017 ‘Dirty Secrets’ on tax havens.
            As I understand it banks use tax havens principally for their customers, though of course they have their local subsidiaries who take a nice ‘advisory’ commission. And the money could ‘come home’ again by buying an asset if something suitable can be found, in order to extract more investment income.
            Banks don’t make the rules they just work them, so I doubt they care whether or not there is any logic to the system. Likewise for Apple and others. After all if they were concerned about logic in the system they wouldn’t be using tax havens because recirculating their profits is actually likely to benefit the whole economies of the countries where they make the real sales. Stashing the money away in countries where they make virtually no sales at all – in tax havens – is good for their own profits but useless for the general economy, as their profit money is in effect removed from circulation.

          3. Thanks for that. So that would mean that as the economy picked up – for example through govt investment – it would become more profitable for companies to invest in something useful?

          4. Exactly. They’d see the opportunity of making a return when they see (potential) customers around with money to spend.

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