This book applies law, logic, and financial history to macroeconomics. Macroeconomics is the branch of economic study that concerns itself with expanding the pie of society. Microeconomics, by far the larger and older branch of economics, concerns itself with expanding the piece of the pie claimed by a particular firm or individual. Microeconomists consider the impact of others’ actions on one firm or individual at a particular moment. Macroeconomists look at an aggregate motion picture created by the millions of offsetting actions that firms and individuals generate for their individual economic benefit.

With one major exception, modest changes in macroeconomic variables all produce offsets. Beginning with Adam Smith in the 1700s, every macroeconomist eventually discovered that one variable—the competitive cost of money, represented by credit spread—consistently increases macroeconomic activity when favorable (low) and destroys economic activity when unfavorable (high). Low and stable credit spreads produce, and are indicators of, financial stability. Every credit crisis begins with a sharp decline in confidence and a commensurate increase or upward spike in credit spreads.

Financial stability is the holy grail of macroeconomics, but it is also a very difficult thing to achieve in a free society. Every respectable economist understands that the world’s ability to sustain long-term growth has been impaired because we have not, to date, solved the problem of sustaining ...

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