What would it do to the economy if wealthy people enjoyed (literally) burning money?

Factual Questions
1

I was hearing about a method to waste money rapidly that “upper middle class” folks like to do. And it made me thing “that hobby is about as efficient as making a big pile of $20 bills and setting it on fire”.

Well, what if the Warren Buffets of the world literally enjoyed doing this. They enjoy the feeling of $100 bills so much that they use burning piles of them to heat their houses, as toilet paper, as rolling paper for their cigars…

If people take wealth and permanently destroy the currency rather than spending it, would the resulting deflation grind everything to a halt? What would the long term consequences be? Assume the super rich can just lawyer their way out of getting in trouble with the Federal government for currency defacement.

2

Warren Buffet doesn’t have as much cash in his pocket as you think. The vast majority of his $58 billion fortune is in Berkshire Hathaway stock.

In order to build his bonfire of the Benjamins he would have to liquidate a substantial portion of his holdings. That would have the effect of driving the price BRK down very quickly, and might cause some temporary panic in the stock market.

It would not cause the world to collapse. The GDP of the United States in 2012 was roughly $16,000,000,000,000. The market capitalization of Berkshire as a whole is a measly $308,000,000,000.

3

Measured as a percentage of the GDP, modern multi-billionaires are paupers compared to the wealth of the noble classes in the eighteenth century. Those huge estates and stately manors represented something like a million times the annual wages of an average workman, and upper class gentlemen thought nothing of gambling away sums that would feed a small town for a year.

4

Doing this is called a potlatch.
Governments do this with enormous sums of money all the time, so the ability for one (or more) wealthy individual to affect the larger economy by doing this is suspect.

5

I’m probably in the minority but I think the benefits of deflation outweigh the drawbacks.

6

Is the effect of burning currency deflationary? yes, it’s reducing the money supply. Would people ever do it on a wide scale (unless preceded by hyper-inflation which had wiped out the value of the money)? Obviously not. And to the extent it’s done on a small scale, it can just be offset by creating more money. Even if somehow done on a significant scale it could be. The govt itself burns huge amounts of currency, when it wears out. That has no effect on the money supply because new bills are are simply printed to replace the old ones.

Also keep in mind the bigger picture that there’s around $700 billion in US paper currency in circulation, most of it outside the US, much of it being used as a ‘store of value’ squirreled away some place rather than being routinely used in commerce. The broad ‘money supply’ OTOH is $7-9 trillion depending how you count it (bank accounts, money market funds and so on, ‘cash’ in non paper forms).

7

The reason that burning money is a bad idea is related to the multiplier effect.

Look at what happens when you spend money. In made up numbers, out of $1000, $100 goes for groceries, $100 for car payments, $50 for gas, $250 for rent, $100 for clothes, $100 for braces for your kids, $100 for tickets to a game, $100 for taxes, $100 into savings. That means that the supermarket can pay its employees, and overhead, and buy more groceries. Your auto dealer can order new cars. The dentist can hire a new dental hygienist. The government can pave the streets. The bank can lend money out to a new business. Spends begets spending. Each type of activity has its own multiplier, but it’s not out of line to say that each dollar spent creates two dollars in total activity over time.

This is great. The more money spent on goods and services and investments and infrastructure, the more jobs are created, the more tax money collected, the more banks can lend out, the more businesses can build new products.

This is also why deflation is hated by all orthodox economists. If you spend less, some purchases don’t get made, some bills are defaulted on, governments collect less money, banks have less to lend out. Everybody suffers. (Technically, deflation does increase the value of a dollar and so makes purchases less expensive, and also benefits creditors because each dollar returned is worth more. But society as a whole suffers because spending and employment drops.)

Burning money is the extreme form of deflation. There is no multiplier effect; money is simply withdrawn from the economy. If enough people did it to noticeably make a difference, the difference would be all bad.

This is all oversimplified, of course, but it’s hard to overstate how important the movement of money across the economy is.

8

Yes you are. Deflation is a very bad thing overall. Money valuation is arbitrary. You can measure it in pennies, dollars or shiny round rocks as long as people spend it. That is what makes the economy go round. In deflation, you reward people for hoarding money. They make ‘money’ by doing nothing except for piling it into a mattress. Savings accounts have to go to negative interest at that point or the banks will fail. In the early stages of deflation, it is like spraying liquid nitrogen over the entire economy. In the long-term, it results in some forms of economic collapse until things correct themselves. Very modest inflation is the best scenario.

It doesn’t matter if a Big Mac costs a nickle or $100 as long as all other activity has caught up to support that relative valuation. The absolute numbers do not matter at all as long as wages and the overall cost of living rise along with it.

9

Actually, worn U.S. currency is shredded and sent to landfills, although the Bureau of Printing and Engraving does sell some shredded bills to the public as souvenirs.

http://moneyfactory.gov/shreddedcurrency.html

And some of it is sold to private manufacturers and recycled into durable consumer goods.

http://m.voices.yahoo.com/products-made-recycled-us-currency-3181152.html

10

Total wealth of all Americans privately held is around $60-trillion, and the amount of cash in circulation is around $850 billion. It is also estimated (nobody knows for sure) that about half of all $100 bills are held outside the USA. So there might be a maximum of a half a trillion in cash that rich Americans can rake together for a nice bonfire, which is less than 1% of the wealth that people have. Burning it all would have negligible effect on the economy., or even on the total wealth.

There is, literally, not enough US money in circulation for all Americans to pay off their $850-billion credit card balances.

How much wealth do you think you have? How much of that is cash?

11

If burning cash were causing a problem due to deflation, it would be easy to solve. Just print more money and have the government spend it to fix the infrastructure or the VA. This would have all the obvious benefits of fixing the infrastructure and the VA, stopping the deflation that would have been caused, and not incurring a budget deficit as there would be no borrowing.

I say go for it.

12

If the government reacted by issuing more cash, it would be equivalent to sending the money to the government. Or, horror of horrors, paying more tax. And yes, deflation would be very bad for the economy. Although very good for me, since I am on a fixed pension.

13

Wouldn’t this be the precise opposite of counterfeiting?

In counterfeiting, there seems to be more money in circulation than there ought to be, which causes it to be worth less than it should. When it is burnt, there really is less around than there is supposed to be, which makes the remainder harder to get, and therefore worth more than it ought to be worth. One might think that’s a good thing, but as the other posters have mentioned, deflation does have some negative consequences.

But all that is in theory. In actual practice, a few dollars here and there are not going to make much difference. That doesn’t justify it by any means, but if the OP wants to know if it will “grind everything to a halt”, I think the answer would have to be, “Yes, but only if the amount they burn is significantly more than the amount of counterfeit currency currently in circulation.”

14

Note too that this is essentially equivalent to burning money.

15

Burning money in the U.S. is illegal:
"Specifically in Title 18, Section 333 of the United States code. It states:

Whoever mutilates, cuts, disfigures, perforates, unites or cements together, or does any other thing to any bank bill, draft, note, or other evidence of debt issued by any national banking association, Federal Reserve Bank, or Federal Reserve System, with intent to render such item(s) unfit to be reissued, shall be fined not more than $100 or imprisoned not more than six months, or both.

This law is enforced by the Secret Service."

16

It’s the principle that important, not the means. Remember the Great Deflation? That’s the one that started in 2007, so it should be fresh in everybody’s mind. One of the major causes was that the housing bubble burst. If a house’s value suddenly goes from $400,000 to $200,000 then that’s the equivalent of burning $200,000 in cash. That alone may have stripped the equivalent of that $850 billion out of the economy.

The effects were gigantic and wholly negative. They were exacerbated by the other financial crises, true, but all the effects were deflationary and all caused by suddenly taking large sums out of the financial system.

17

Try reading the OP next time. I specifically address this in noting that you can assume for the sake of this discussion that the super-rich setting the bonfires have much better attorneys than the Feds who would prosecute them for their vice of burning benjamins.

18

That’s the point I was trying to make. It’s an illusory equivalent, but not the fact of “burning money”. Burning $200K in cash is the equivalent of burning down a $200K house, not just temporally causing a fluctuation in its market value.

In fact, the loss of value of the house that you described is not the equivalent to burning anything, because the value of the house is fluid, and if not burned, can regain its original value and more. Which, in many cases, it did.

19

The super-rich and big corporations usually have better attorneys than the Feds–it is incorrect that they are never are successfully prosecuted.

PS. Why is this question allowed in General Questions?

20

I disagree. Burn down a house and you destroy a real asset. Burn a bunch of paper and you’ve destroyed nothing of real value, just some IOUs. Burning $200,000 is much more like waking up one morning and finding your $400,000 house is now valued at $200,000. The drop in market value is only important if you were planning on selling your house, or borrowing money while using the house as collateral. Burning $200,000 only matters if you were planning on using that cash to buy something.

Taking money out of circulation is what causes deflation. It doesn’t matter if the money is burnt, or locked in a bank vault, or buried in a hole in the backyard. If the money isn’t circulating it might as well not exist. Note that putting money into a savings account at a bank isn’t the same as stuffing the money into a vault, because money in a savings account is an asset to the bank that they can use as capital. Instead of stuffing it into a vault, you’ve lent that money to the bank. This increases the amount of money in the economy the same way that lending the money to your brother-in-law to start his custom van mural painting business does.

Cash money is just an IOU that says that the bearer is entitled to $X worth of goods and services. Burning money is transferring the value of the money to all other holders of money. Note that since the government can make as much money as they like, a lot of the value transfers to the government.

Too little money in the economy creates economic friction. You can’t start your custom van business without equipment, but you don’t have the money to buy the equipment, and can’t get a loan to buy equipment, and so the value created by your custom van business never actually gets created. When there’s plenty of money it’s easier to start your business, or get a loan. The problem comes when there’s too much money, since money follows the same laws of supply and demand as any other good, too much money means the value of money drops, which is to say you have inflation. It’s much better to think of inflation, not as prices for everything increasing, but the value of money falling.

Of course the rich burning piles of money can have psychological effects beyond the literal value of the money being destroyed. Burying the money in the backyard has the same deflationary effect, but people seeing that the rich are literally destroying money for the fun of it could cause people to question the value of money, and their place in the economy, and the political system that keeps everything going.