On a macroeconomic scale, what happens when you burn money

Factual Questions
21

But in all this discussion, rice Porsche or dollar bills, we’re talking about the replacement costs. If I have rice or $100 bills, I have done all the work needed to create this asset for myself. When I try to simulate single-entry bookkeeping, the asset disappears with no gain to anyone else. The only effect on the market is that the commodity is that much more scarce. with any scarcity of any commodity, prices will rise and assorted buyers will fin substitutes - wheat or debit/credit.

Paper money is perhaps more interesting in this regard, in that it cannot be created - except by one entity who can create any amount at whim (but shouldn’t). They make an effort to regulate the scarcity to keep the value stable. its inherent value is due to confidence in the entity issuing it (and its ability to be exchanged for other goods), but its relative value, like any other commodity, is scarcity.

Perhaps a similar thing to think about is what would happen if the banking system computers died overnight; all banks lost the ability to be know what was in bank accounts. Same idea - suddenly, that retirement nest egg you had disappears, your last payroll deposit disappears, and there’s no way to get it back or prove it existed. (Karma would dictate that your mortgage disappears at the same time, but… yeah, right.) Chaos would ensue, and you can bet the government would find ways to provide an alternate system very quickly, but suddenly cash would become much more valuable - people would hoard it, people would sell for cheap if paid cash… We see this when a hurricane or something knocks out ATM’s. Cash becomes more valuable.

22

Yes, but there’s a difference between an electromagnetic pulse that wipes out all computer data worldwide, and one guy burning a big pile of money that represents only a tiny fraction of all cash.

Burning the money doesn’t destroy much value. It just removes money from the economy, which is deflationary. But it’s such a small amount compared to the entire economy, let alone the entire money supply, let alone the entire supply of cash, that the effects will be negligible.

Buying $10 billion worth of rice and setting it on fire would mean destroying $10 billion worth of real assets. Destroying $10 billion worth of cash only destroys something like $1 million worth of real assets, if we round off the cost of printing a $100 bill to $0.10 each. Destroying the rice means that everyone who wants rice will have to pay more for it in the future. Destroying the money means that everyone who wants money will have to pay more for it–that’s deflation. But if we don’t want that deflation we can easily print another $10 billion in cash. Or we could print another $100 billion in cash if we want inflation.

If we want more rice, we have to have tractors, land, farmers, trucks, fertilizer, water, and on and on. It’s an expensive proposition to create $10 billion worth of rice. Like, nearly $10 billion expensive. Creating $10 billion in cash only costs about $1 million, again, rounding off to ten cents per Benjamin.

Destroying a giant pile of rice makes the world worse off by $10 billion. Destroying a giant pile of money doesn’t.

23

I think the key to the question is if you didn’t burn it what would you do with it? If it is a choice between this, and leaving it in your bank account, then burning it will be 10 billion less for that bank to loan, which might (slightly) raise interest rates. If the alternative was spending it all on hookers and blow, than by burning it you prevented a destabilization of the cocaine and escort service market. If you were just going to put it in a big pool and swim around in it, then the difference is negligible.

24

That real assets have an intrinsic value that paper does not is basic. Let’s start with some simple examples.

You and your neighbor have nice houses, with a swimming pool right smack in between. The piece of paper that informs us who the pool belongs to (and which therefore has a “value” equal to the pool’s value) is accidentally burned. (There are various ways to set this up. Perhaps you’ve been amicably sharing the pool for so long you’ve forgotten who owns it. Perhaps after the burning you both sell your houses in a huff and let the new owners worry about it.)

The key point is that the intrinsic value of the swimming pool is the same as it ever was. Maybe the two neighbors will work out an equitable arrangement (even day, odd day); maybe they’ll hire lawyers but the pool wasn’t destroyed — the piece of paper was. For those saying the paper had the same $20,000 value as the pool, does the value of pool ($20k) and paper ($20k) total $40k altogether?

Another example: You burn a million dollars worth of Ajax Corporate bonds. You still get interest checks so you burn them to. The corporation eventually notices that these bonds weren’t redeemed; next time it wants to borrow $100 million it only borrows $99 million instead. The 100 millions shares of stock in Ajax corporation which had a fair market value of $100 each are now worth $100.01 or so. Balance is restored!

@ md2000 — in these two examples of burning paper assets, the paper was directly tied to a specific ownership, while currency represents purchasing power not any direct possession. Is that where you make your distinction?

The fact that the currency is only the potential for a purchase, rather than documenting an ownership, should make the point more clear-cut, not less. After you burn your $100’s, deflation causes all the other $100’s to be worth $100.01 or so. Balance is restored! (The details are difficult; the practical distinctions among M2, M3, M4, M6 money are fuzzy and, anyway the FRB has its feet on the rudder and will push the right rudder a smidgen when necessary.)

Imagine two scenarios of apocalypse. In scenario 1, all the financial paper is destroyed (along with the financial data stored on computer media), but the houses, roads, machines, wheat fields and pig farms are all intact and as valuable as they ever were. In scenario 2, the papers are all still there, but all the crops are dead, and all the buildings, machines, roads and insulin dosages have all vanished. No dispute that scenario 1 will lead to severe panic and violence. Do you think it would be more catastrophic than scenario 2?

25

Not trying to fight the hypothetical, but I think it depends on what “assume you have” means.

If it means the money magically appeared out of nowhere and you then burned it, then nothing at all happens macroeconomically.

If it means that you acquired it by fair exchange of goods and services for the money and then burned it, there would be a change in macroeconomics. Now, would you credit the change that results from the whole process to the burning of the money, or to the selling things part that generated the $10B? If this is what is assumed, the net process is really about production and distribution of wealth without receiving anything in exchange.

So, either you’re doing nothing, or what you’re really proposing to do is to add $10 billion in goods and services to the economy without actually receiving anything in exchange.

26

If you do the work of creating hundred dollar bills, you’re breaking the law. The point of owning money is that you can’t make it yourself; the supply is controlled by the government. Everyone else has to offer goods or services to obtain money.

Rice, in contrast, is something you can produce directly. Or, if you don’t want to get your feet wet, you can obtain rice by offering something like goods or services or money to somebody with wet feet.

27

You don’t actually have to verify the destruction. You can burn it all in a secret midnight ceremony.

What the government watches for are the effects in the economy. They look for signs that there is either too much or too little money moving around in the economy and adjust the money supply accordingly. So ten billion dollars being burned has the same effect as ten billion dollars being stuck under a mattress or shipped to Libya; what they notice is the economy seems to be a little light on cash. In fact, gathering ten billion dollars in currency together in order to burn it would have just as much effect regardless of whether or not you actually burn it; you took that money out of the economy just by putting it into a pile in your backyard.

28

Eh, if the world knew that $10B was being hoarded it would change the calculation a bit as the fed would have to account for the potential that such would be back in circulation at some point. An inflationary spike would occur if the world adjusted for a smaller amount of cash in circulation and suddenly it was larger again.

Again, at $10B it would be a temporary blip, but it would be visible in the numbers, at least for a quarter or two before things adjusted again.

I suppose all that would do is to allow a private citizen the ability to exercise some small control over the money supply twice instead of once (burning it would certainly be exercising control…but only the one time).

29

That’s a good point. The other possible change based on assumption mentioned is whether the money appeared magically or was earned in return for goods or services, but the OP post seems to imply pretty strongly it was accumulated in return for goods and services since asking if burning the money somehow negates the value of the particular goods and services provided in exchange for that particular money (which it doesn’t). Then the main open assumption is whether you’d have otherwise spent or invested* the money, not hoarded it till death, telling nobody where it’s hidden, or till it rotted in the ground (see Narco’s). The latter is the same as burning it, both for you and the economy as a whole.

*which includes for this purpose depositing the money in a bank.

30

No, by “I have done the work” I mean I have somehow earned $100 or $100M. I produced something that someone exchanged for the bills; I now own the bills. If I destroy them, rather than trading them for rice or a Porsche, they disappear from the landscape. It’s what it cost me. Whether what is destroyed took $100 or $1000 to produce is irrelevant, unless I have some magic method (or printing press) to create wealth without the requisite effort. I have to somehow get actually $100.

And by the way, the amount of actual cash - bills and coins - is significantly smaller than the total amount of dollar assets in assorted financial institutions. The vast majority of transactions do not involve cash, and thanks to credit/debit cards, even less as time goes on. So the destruction or removal from circulation of a large amount of cash will definitely have an effect. We take for granted that a retail merchant can make change (unless presented with a large bill). The disruption level when that is typically not the case will be significant. (There’s the famous story of Italy in the 70’s being short of small change - to remedy this, they ordered a minting machine from Sweden but it wouldn’t fit through the doors of the mint. Merchants would give out candy instead of small change. ) I once knew the difference between the different M1, M2 etc. money supply definitions. Macroeconomically, some of these go down when money is burned. As for the appropriate level of cash, the mint/Treasury determines the appropriate levels to ensure there is no bottlenecks in the economy. They are constantly adjusting this. And, as mentioned, there are alternatives to hard cash. The feds can print more bills, and unless the supply changes noticeably, they will retain value… particularly since, as mentioned, actual cash is a small proportion of the total money supply.

So, distinguish between shortage of bills and shortage of money in general. For you, if you lose an asset - your money burns up, your (uninsured) house burns down - you lose. People who were expecting to benefit from your asset lose; the grocer does not see you buying as much because you are short of money; the guy who wanted to buy your house may have to buy a more expensive one or do without… etc. Business levels go down, the GDP takes a hit. A 0.0000001% hit is basically noise lost in the statistics; a much larger hit, less so.

31

But that economic hit is due to the deflation of the money supply, not the loss of real assets. To the extent that deflation is a problem it can easily be countered by the Fed, they just create more money.

That’s the difference between modern fiat currency and real assets. It’s hard to create real assets. It’s easy, if you’re a government, to create fiat money. The hard part is not creating more fiat money than you need and inflating away the value of the money you were trying to create.