On a macroeconomic scale, what happens when you burn money

Factual Questions
1

Assume you have 10 billion in $100 bills, and decide to just set fire to it.

On a macroeconomic scale, what does that actually mean? The labor that produced that wealth still happened. Granted, now the person who obtained currency from that labor has now destroyed the currency.

Person(s) A produce labor which has value, which I take a piece of that value as the business owner. I now have 10 billion. I burn all 10 billion.

Is the ‘value’ of the labor those people produced actually gone forever if I burn the money? If by magic all the money disappeared tomorrow, all the labor we’ve been exchanging is still there.

2

In the big picture, nothing much changes. Physical money is not really wealth; it’s just a convenient way to keep track of actual wealth and make trades. So the amount of physical money that’s in existence is based on how much need there is for it in the general economy.

If you burn a bunch of currency without destroying any actual wealth, then the amount of currency will fall a little below what the economy needs. As the effects of this shortage of currency ripple out, they’ll be noticed and the economic system will respond by introducing new currency into the system to replace the currency that was burned. Within a few months, the total amount of currency in circulation will be right back where it would have been if you hadn’t started your fire.

3

Yeah, on a marginal basis, everyone’s remaining dollars will be worth a hair more as there’s fewer of them chasing the same amount of wealth. But it would balance out pretty quickly.

You, on the other hand, would be out $10B with no one to blame but yourself.

4

Yes, on a microeconomic scale, you really screwed yourself.

5

So basically the wealth the billionaire had is distributed throughout society because everyone else’s dollars become slightly more valuable?

I guess that makes sense.

6

In a greater philosophical sense - economics started off as a branch of philosophy - money is equivalent to favors you have earned, by doing things that the rest of society valued. Depending on how well society values your work (based on supply, demand, and your and your class’s ability to negotiate a slice of the pie with your employer), you might get more or less money, but we interpret that as equating to “here’s how much you gave back to society.” And the value of the money is in saying that you can gain from others an equivalent amount of labor back, towards your personal safety and happiness. Money is a debt that society owes you.

When you burn the money you are, in essence, allowing the rest of the economy to forget their debt to you.

Now, if you are a person with great plans for society - you could have figured out how to cure cancer, if only you had had capital sufficient to finance the R&D - then that’s a loss to society. You could have used the debt you held to bring in others to help you, and now that opportunity has been destroyed.

More often, one would expect that you would use that money to a) keep yourself alive, so that you can continue contributing to society, and b) keeping yourself happy, so that you want to continue contributing to society, making the world a better place in at least a small way, even if it’s not curing cancer, or c) loan the money to someone who wants to find a cure for cancer, or otherwise do something that everyone in society would appreciate.

By destroying the money, while you are freeing society of its debt to you, you’re now destroying your own ability to survive and to keep yourself enjoying life by at least some amount, and destroying the ability for that money to help others.

How it all balances out will depend to some extent on why you burned the money, but in general it is a negative.

Now that was more just the philosophical side of things. Getting into more modern macroeconomics, then you start needing to understand how most of money exists.

The majority of money in the economy exists as a debt owed to a bank. Either a customer/business facing bank has loaned out money - probably going into debt on their end - or the central bank has loaned money to a normal bank - definitely going into debt to do so.

Allowing banks to go into debt - in essence holding a negative quantity of cash in their coffers - is something that is seen as “okay” because something like 98% of people who take on loans pay them back. So the total debt load is actually quite a bit smaller than it seems, in an actuarial sense. And then, further, the banks charge interest. This allows them to recoup that final 2% that the defaulters didn’t pay (plus make a bit of profit). And, overall, loans are good because they give people the opportunity to put grand visions, that will make the world a better place, into effect. To be sure, most “grand visions” are just a new restaurant. But the population is growing, and food does make people happy. The world does become a better place, thanks to loans.

On the side of the central bank, they’re less concerned about recouping their debts…because magic. That goes back into philosophy, but basically comes down to making the world a better place and having a military.

Every year, more loans are taken out, for larger sums, than in the previous year. And loans often have a period of 20+ years. It goes out faster than it comes back in. In result, most money that exists in the economy exists as money which was created by a loan and which hasn’t been paid back yet. And that quantity grows from year to year.

When you receive money, you’re receiving money that was loaned out to someone. That person had a dream. They expect to be able to recoup their money, based on putting their dream into action. Their dream will, necessarily, be a money-making venture since that’s how we encourage people to do good work for society. We allow them to profit off of them. We’ll call this someone George.

George wanted to build a new restaurant. He took a loan, built his restaurant, paid you to help construct it, and now you have burned the money.

Had the money continued to exist, then it could have gone back towards buying food at restaurants, like George’s and helped George to pay off his debt to the bank. But, that money having now been destroyed, it can never make its way back to George or anyone else who owes money to a bank.

Overall, this raises the risk that George and others will default on their debts, and if lots and lots of people started taking up money burning as a hobby, then it would effect the defaulting rate of debtors.
Instead of 98% of people paying off their loans, it might change to 94%.

Consequently, banks would need to raise their interest rates.

Higher interest rates then mean that it is more dangerous to try and start a business.

And so, in the end, fewer of the people with a grand vision for how to improve the world will do so.

7

Yes, except it’s not, “The system”; it’s the Federal Reserve or the central bank if it’s another country.

In the US, would that act confuse them?

Total US GDP is around 20 trillion. So we’re discussing 5/100 of 1% of total output. Cutting that much demand on the economy (which is not what you are doing) isn’t an especially large shock. Total currency in the US is 1.6 trillion dollars. Losing 6/10ths of 1% of it… might be noticed in some way. But it doesn’t sound too burdensome.

Let’s say you withdrew the currency from your bank account, then set it aflame. The money supply would contract somewhat. M2 is now over $14 trillion. Losing 7/100 of 1% of it… would probably cause the Fed to buy a few more bonds during open market operations, releasing extra money into the system in order to keep short term rates where they want. Not especially disruptive. That’s during normal times, i.e. before 2008/2009 when the Fed started their very low interest rate policy.

I’m not sure what would happen mechanically under current Fed policy, but again $10 billion is a small enough proportion that I doubt it would matter too much.

8

Nah, let’s say you sold some of your treasury bonds, converting them to cash, then set those $100 bills aflame.

Otherwise we have to worry about disrupting your local bank, whose reserves may or may not be able to cover your withdrawal.

9

Some general comments:

  • To the extent that you have destroyed your claim to about 0.01% of, say $100 trillion of American wealth, the average American would become 0.01% wealthier. I’m not sure exactly how this would play out; I think much of the added wealth share would accrue to private banks.

  • Removing currency from circulation is deflationary. However, if the deflation was enough to be visible the FRB would combat it by loosening its monetary policies.

  • This isn’t hypothetical! Billions of cash dollars are removed from the U.S. every year and used as currency for local transactions (or reserves) in other countries. This cash might as well have been burned as far as its effect on the U.S. economy. Cash often goes overseas in lieu of “laundering” its criminal source. Destination countries include those with unstable currencies, e.g. Russia, China, Argentina, Turkey. Naturally this removal of cash counters inflation and serves to strengthen the U.S. financially. This “reserve currency” status may be an important reason why the U.S. outperforms financially.

  • Gathering the $10 billion of cash would take considerable effort. I’ll guess that that figure is in the same ballpark as all the cash banknotes presently sitting in the vaults of all the retail banks in the U.S.! I wonder how often customers withdraw even $5 million in cash. Casinos might have an occasional need. Others?

10

The stuff you can set on fire is M0 not M2 so the total is “only” around $3,750,000,000.

11

Well the stuff you can set on fire is currency (now $1.6 trillion). M1 is composed of currency and checking accounts. M2 is M1 plus savings accounts, consumer CDs (called small time deposits) and retail money market funds. M0 is a less commonly used term for the US, but I see it can refer to currency outside of bank vaults.

The point I was getting at though was that to the extent that the Fed targets anything at all, it targets M2. So if you liquidate treasury bonds and convert them to currency (why? why?) the fed would care about its impact on M2 (and, to be honest, total reserves in the banking system, which are currently $1.9 trillion).

The impact on currency would be more of a concern for the gang that print the money, the Bureau of the Engraving and Printing. And even then, $10 billion would be managable.

Frankly, I don’t think prices would be affected at all, insofar as the Fed would automatically make adjustments for the Scrooge McDuck tomfoolery described in the OP. The Fed would keep short term interest rates where they are, so there would be no changes in demand for goods and services in the economy, assuming Mr. McDuck didn’t change his spending habits. If he did decide to build 3 fewer mansions this year, that would be different.

12

How much space would $10 billion take up?

$1 million of $100 bill takes up 689 cubic inches. Cite.

689* 10,000=6,890,000 cu inches or 190 cubic feet, or a cube 5.75 feet (1.75 meters) on each side. About as tall as an average male. (Admittedly you can’t fit rectangular bills into a perfect cube, but this gives a rough idea.)

13

Currency is merely a way to ease transactions. In today’s world we need to stop thinking of currency as money or wealth. Most transactions are electronic and are the exact equivalent of currency. A cashless society would be essentially identical to our current world, at least on the macro level.

14

Figuring 1 banknote as 1 gram
$100,000 = 1 kg
$100 M = 1 metric ton
$10 B = 100 metric tons
This seemed incompatible with your 1.75^3 m^3 cube. I think there’s a problem with your “6,890,000 cu inches or 190 cubic feet,” I get 6,890,000 cu inches = 3987 cubic feet.

15

Ouch.

689* 10,000=6,890,000 cu inches. Take the cube root of that and obtain a cube 190.29 inches on its side. Or 15.86 feet on each side. Not 5’ 9". 15’ 10", or 4.8 meters.

Thanks for the heads up: I almost lost my contract with Mr. McDuck! :smiley:

16

No different than if you destroyed a similar asset. If you dropped a few thousand worth of gold into a volcano, or let your $100,000 worth of meat rot, or dropped your Porsche into a volcano - then the world is short that asset. You will miss it more than the rest of the world. Macro-econoimically, it will affect the macro world only if you have destroyed a significant amount of a commodity that everyone else wants. Money is just a commodity, and cash is just a form of money. If you destroy 10% of the world’s rice supply, then the world price of rice will go up. If you acquire and burn half the supply of US cash bills, people who want cash will be more desperate for it. If $100 bills are hard to come by, the price of cocaine goes down since fewer people can find the cash for a transaction, it’s harder to sell. For other goods, the use of credit cards and debit transactions will increase, since they are valid alternatives. Or, drug dealers will be more willing take British pounds, Euros, etc. instead.

(This has actually happened. When a local banana republic loses confidence in their currency, the population will (un)happily switch to other stable currencies. Not sure what the effect was in India last year when they basically cancelled all bigger Rupee bills, but one effect I found was it was difficult to find a functioning and loaded ATM giving out new bills).

17

Not really. Fiat currency is essentially replaceable. We could produce a quadrillion dollars if we wanted to (although that would destroy the value of the money). So if we burned ten billion dollars worth of currency, we could just replace it with new currency that would be identical. (Let’s ignore the trivial costs of the paper and ink and printing process.) We can’t do that with gold or meat or Porsches, which require non-trivial amounts of resources and/or labor to produce.

18

Little Nemo’s “Not really” was much too polite. “Completely wrong” is the phrase I would have chosen.

Since variations of this question have been asked and answered at this message board over and over and over, I’m not going to try to type in yet another variation of an explanation. But let me pose a question to you:

Since last December, IIUC almost $60 billion of Bitcoin wealth has evaporated. Do you think this had as much effect on worldwide wealth as if 200,000 houses suddenly vanished? Or 60 million iPhones?

19

But the bitcoins weren’t destroyed (mostly). people just don’t value them as highly. What happens with bubbles and irrational values of assets is a different kettle of fish. there are still X thousand bitcoins, people just won’t pay as much for them, so you’ll have to buy a Hyundai not a Porsche.

But yes, fiat currency is an easily replaceable asset. Once the feds print enough larger denominations, the price of cocaine will stabilize. Unless they can verify that the bills are a replacement, however, there is the risk of devaluing the currency with excessive printing. Consider the alternative scenario, where dictator Kim Il Ghadaffi converts oil into dollars and squirrels them away in a cavern in the Sahara. The available cash floating around in the world becomes scarce. Same effect as if he burned it. Then, responding to rumors he did burn it, the fed prints more. Then the Revolution comes, and all that money is spent to buy peace and happiness for the citizens… and the world is flooded with dollar bills…

20

As was mentioned above, cash really does go oversees for various reasons, and as far as the US economy is concerned it might as well have been burned. It’s only if the various oversees users try to buy American goods with the cash will it cause inflation in the US.

Yes, cash is a physical product and it takes some effort to print up new hundred dollar bills, so we’re out the actual work of creating a giant pile of hundred dollar bills. But that work to create a hundred dollar bill is much much less than $100. The work to create a $100 bag of rice is much closer to $100, rice as a commodity global agricultural product has razor thin margins. It takes close to $100 to produce $100 worth of rice. Googling around it costs about $0.12 to produce a hundred dollar bill. So the margins are completely different.

Burning that much cash causes a slight deflation, which means the value of the dollar will increase ever so slightly. The much bigger economic effect will be how that pile of cash is assembled. Bill Gates has a bunch of money, but he doesn’t have a Scrooge McDuck style swimming pool filled with cash. Instead he owns a bunch of productive assets, like, you know, Microsoft.

So if Bill Gates wants cash he has to sell his Microsoft stock to raise the cash. What effect does that sale have on Microsoft? Does selling off a huge portion of the company tank the stock? Does that mean the company is in trouble? Obviously you sell the stock to people who want to buy the stock, but what happens when you’ve sold 5 billion dollars worth of stock and you’re having trouble finding people who want to buy? You have to lower the price. And then the buyers ask themselves, if Bill Gates is selling Microsoft, does that mean he knows something we don’t? Why are we taking this risk? And I assume Bill Gates is probably covered under insider trading rules, and has a lot of restrictions on how, when, and why he can sell his stock. The point being, selling $10 billion worth of Microsoft stock could lead to some pretty drastic consequences for the company, even if in theory all that is happening is to change the identity of a fraction of the owners of the company.

The news accounts of “Billionaire sells off $Profitable_Company, sets the cash on fire” are likely to have much more noticeable economic effects as the stock markets react irrationally to the billionaire’s irrational actions than just quietly removing $10 billion in cash from the economy, which happens all the time.