Many people are wondering why the recovery from the most recent recession in the United States is ‘dragging on’. They can find part of the answer in the pages of this book, and its focus on the recent shocking and alarming plunge in the velocity of money in the U.S. Readers can consider failing to maintain values of the velocity of money in the U.S. closer to its value in the fourth quarter of 2007 as similar to missing an important piece of a puzzle or missing a key ingredient in a recipe.

Did the title get your attention? Let me make some clarifying remarks. I am referring to myself, if anyone, when using the word ‘stupid.’ For those not familiar, the velocity of money is an average – the average number of times that a unit of currency trades per time period (for example, how many times the United States dollar trades in a year). As Mishkin (2004, p. 518) and likely many others point out, the average is calculated by dividing a measure of spending by the number of dollars in circulation. When the measure of spending is the total amount spent on the goods in gross domestic product, the main measure of production in the U.S. and other economies, the measure of velocity is called income velocity, as noted by Dornbusch, Fischer, and Startz (2008, p. 386) and others. The income velocity of money in the U.S. has fallen most quarters after the fourth quarter of 2007, and it has fallen sharply. Hereafter, use of the term ‘velocity’ will usually refer to income velocity.

The velocity of money fell by more than thirty-seven per cent after the fourth quarter of 2007 through the first quarter of 2013 based on data from www.economagic.com, and in the year 2014 it appears that velocity is still falling further! Unemployment rates jumped up in the Great Recession and have been declining but at a tortoise-esque pace in the Not-So-Great Recovery. Lives have been disrupted, if not devastated. Are these events related?

Readers may come away from this book with the sense that the suffering and hardships that many have endured as the result of the economic downturn could have been reduced, if not prevented, with improved policy. Unfortunately, without a better understanding of the velocity of money, the lackluster recovery could continue to be lackluster. Fortunately, remedies should be readily available. If a lack of spending is the problem, stabilization policies provide the solution, so that optimism and solid growth would replace despair and near stagnation. An improved understanding of why this downturn is different than most, combined with appropriate fiscal (and perhaps monetary) policies could restore income and jobs for those tragically deprived for far too long.

AUDIENCES AND CHAPTERS

This book is written with the goal of providing value to audiences with different levels of expertise in macroeconomics and also different areas of interest. Those with less experience in macroeconomics may have their interest piqued by seeing the velocity of money within the context of a recession and a sluggish recovery precipitated by the most recent financial crisis in the U.S. For them, the introductory material presented here will help to make the more advanced material easier to comprehend. On the other hand, economists may instead find the introductory material to be a useful, refreshing but optional review. They may also find some of the questions raised stimulating.

Economists may prefer to read the first part of Chapter 1 (before the crash course in macroeconomics), at least parts of Chapters 2, 3, and 4, and then skip ahead to Chapter 8 which sums up the work presented in the first seven chapters and discusses some of the work remaining. They may then refer back to earlier chapters to see how this book culminates with Chapter 8. Those with less expertise in economics may benefit from reading the chapters in an order closer to, if not exactly the same as, the order in which they appear.

Those seeking an overview of financial crises, as they appear related to declines in the velocity of money, may want to read Chapter 5. Some may want a quantitative and descriptive analysis of factors that may impact velocity. They may find Chapter 6 and the ‘In-Chapter Appendix’ in Chapter 8 useful. Those who want to learn more about the money multiplier model and the money supply process may find Chapter 7 helpful. A further overview of this book appears in Chapter 1.


BUYER BEWARE

While I have taken considerable steps to eliminate errors of commission (and omission) in editing this book, it is highly likely that some errors will remain. However, please bear with me in the interest of making this book available and its drawing attention to velocity as soon as possible. I make no warranty that this book is free of errors, and I apologize for any and all errors. Should this book reach a revised edition or a second edition, I hope to correct as many errors as possible, as well as make other revisions such as extending the sample period. I cannot assume liability should users of any material in this book incur damages.

Please keep in mind that, in some cases in this book, I have not read the original source material of works referenced, and I am relying on the descriptions of others (whose works are referenced). Further, my referencing of other works in this book does not imply that I agree or disagree with these works. Also, I may not have read referenced works in their entirety. I cannot assume liability for any resulting damages. In the interest of making this available to readers as soon as possible, I am publishing this work with these caveats.


REFERENCES

Dornbusch, R., Fischer, S., and Startz, R. (2008) Macroeconomics, tenth edition. McGraw-Hill Irwin, Boston, Massachusetts.

Mishkin, F. S. (2004) The Economics of Money, Banking, and Financial Markets, seventh edition. Pearson Addison Wesley, Boston, Massachusetts.