Grace -
If you have a check from one of your customers, and set it on fire, you are out the amount of the check, unless and until you are able to get it replaced.
OTOH, if your customer sets the check on fire before he gives it to you, it is no economic consequence whatsoever.
While this example is simplistically obvious, I claim that it is representative of a class of economic anomalies that sometimes cause severe confusion.
Generalizing, the check is an example of a representational kind of wealth, normally used to facilitate transfers, whose economic value is dependent on exactly who possesses it.
As a counter-example, if you have a bar of gold, and transmute it into lead, most of its value is lost, both to you and anyone else who might need it to produce something.
If you set fire to a $100 bill, you lose its value, but no one else is affected, other than that their money will suddenly have incrementally higher purchasing power due to a reduction in money supply. However, the US Treasury can set fire to undistributed new $100 bills with impunity and have no economic effect.
While the above examples would probably cause few arguments, there are other cases in which that is far from true.
First is the case of the non-marketable US Treasury securities held by the so-called Social Security Trust Fund. You could hold an identical security and risk its loss of value by burning it up, but neither the securities nor the Trust Fund itself have any economic significance as they are simply US IOUs transferred from one pocket of the government to another. Needless to say, this either confuses a lot of people, or they are deliberately lying for effect, or both.
Second is the case of corporate stock certificates. A company can print new certificates, store them in its vault, and then destroy them, all without economic consequence. Only if they are distributed, do they become of value. The confusion of this fact leads to the widespread calls for the explicit accounting of stock and option grants on the company income statement. To do this would represent double-counting, as long as the grants properly appear in the dilution of existing shareholders.
Can you think of any other examples?
Regards, Don |
