Ȁȃȁ Partʺ: Economicsabsence, as about the degree and location of risk. Financial complexity
erodes information.
During the recession that began inȁǿǿȆ, lenders held back from lend-
ing; banks accumulated huge excess reserves of base money newly created
by the Federal Reserve; and investors and consumers postponed spend-
ing. Ļe demand to hold money and near-money assets strengthened rel-
ative to income and expenditure: the velocity of money fell. Uncertainty
was at work according to interpretations circulating widely toward the
end ofȁǿȀǿ. Businesses could hardly predict the impact of the mammoth
new laws affecting health care and finance. Uncertainty about whether
the Bush-era tax cuts would be allowed to expire, extended, or modified
contributed to hesitation in hiring and in making major expenditures.
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To understand what scope disordered money has for doing damage, it
helps to recall money’s immensely valuable services when it works even
halfway properly. It vastly facilitates the exchange of goods and services
for one another. Indirect exchange through money takes place not only
among people working in different sectors of the economy but also over
time. Ļrough building up and drawing down cash balances and through
credit transactions, people can arrange to receive what other people pro-
duce either before or after they deliver their own outputs. Ļis intertempo-
ral aspect of money facilitates the pooling and mobilization of savings and
so promotes real capital formation, which, like specialization, enhances
productivity.
Money serves not only as the medium of exchange but also as the
unit of account, the unit in which prices are quoted, bookkeeping accom-
plished, contracts written, debts expressed, subjective evaluations formu-
lated, benefits and costs of activities appraised, prospective and past profits
and losses estimated and recorded, and taxes levied. Ļe vital roles of mar-
ket prices, profits, and losses expressed in money received attention in the
debates over socialist economic calculation initiated by Ludwig von Mises.
When monetary disturbances require substantial changes in general levels
of prices and wages, then,whether or notthese changes occur promptly, the
functions of prices, profits, and losses in conveying signals and incentives
suffer disruption. One notable glitch is the debt-deflation aspect of depres-
sion described by Irving Fisher (ȀȈȂȂ). Comparable effects occur when
price inflation or deflation turns out substantially greater or slighter than