On a given day, you probably think about ways to get more money, ways to spend less money or good things for which you could trade your money. Chances are, you probably don’t devote much thought to the economics of money. Dissent in the Federal Open Market Committee and a concerted effort to block the reappointment of Fed Chairman Ben Bernanke has given monetary policy a disturbing amount of drama. I’m not educated enough to have opinions on monetary policy, but I am smart enough to make a list of interesting facts I wish someone would have told me a year ago when I thought I knew something. 1. Inflation is bad, but deflation is worse. – Inflation, when the money supply grows faster than the real economy, is bad. It’s harder to plan for the future when prices are rising. When inflation rates are fixed, wealth is unfairly transferred from creditors to debtors. Savers find their life’s work eroded. All this is true, but mild deflation, when the money supply shrinks relative to the real economy’s demand for money, is far worse than mild inflation. Workers are relatively happy when inflation raises their wages, but they are less likely to accept the pay cuts accompanying deflation. In economic-speak, wages are sticky downwards. Deflation leaves wages too high, a recipe for unemployment and recession. 2. A stable amount of money is a terrible idea. – Imagine a world with one hundred $1 bills. If every bill, on average, trades hands six times per year, then there’s enough money to support $600 of GDP. If every dollar trades hands three times per year, then there’s enough money to support $300 of GDP. These fluctuations in what economists call ‘velocity’ can have nothing to do with the real economy. To prevent distortions, it’s nice to have a flexible money supply whose size can vary inversely with the amount average demand for money. As Milton Friedman and others argue, the Fed’s commitment to the gold standard prolonged the Great Depression. Fractional Reserve Banking gives our money much-needed flexibility. 3. There’s an argument the Fed didn’t create enough money in the crisis. When the Fed creates more money, the federal funds rate falls. Since the fed funds rate has been near zero since late 2008, a casual observer might mistakenly think the Fed has been aggressively printing money. Lenders don’t demand a high interest rate when inflation expectations are low and economic growth is marginal. Amidst the fizz of the commodity bubble and the pessimism of a recession, the federal funds was going to go lower no matter what the Fed did. The Federal Reserve did create large quantities of money in an attempt to contain the sub-prime crisis, but it also started the new practice of paying interest on excess reserves held at the Fed. When it did so, excess reserves shot to more than $1 trillion dollars. The highest spike before 2008 was to $19 billion during the panic of 9/11. When banks hold excess reserves, velocity is lowered, and there’s less money to go around. Journalists trying to make Time’s Person of the Year sound interesting like to make the Fed’s response to the crisis sound dramatic, but some economists, most notably Bentley University Professor Scott Sumner, argue Bernanke didn’t do nearly enough. By subsidizing commercial bank inaction, it has elongated the crisis. As macroeconomist Greg Mankiw put it in an April 2009 New York Times column, ‘There are worse things than inflation. And guess what? We have them today.’ That said, there are intelligent, well-intentioned thinkers on both sides of every controversial issue I addressed in this column. Quite frankly, I’m tired of having money on my mind. I’d rather just have my mind on my money. Daniel Morgan is a 21-year-old economics major from Baton Rouge. Follow him on @TDR_dmorgan. —– Contact Daniel Morgan at [email protected]