Jan

22

Inverted Curves

January 22, 2021 |

Duncan Coker writes: 

Amid all the melee of the last year it is easy to forget the yield curve inversion that occurred in May of 2019 presaging a recession in 2020.  This indicator is 4/4 on calling recessions within 12 months including 2020, 2008, 2001 and 1991.  Of course a lot of things can and do happen 12 months before a recession including pandemics, lock downs, credit crisis', bubbles, real estate and oil shocks.  Bankers hate inverted curves because it makes renting money more difficult. Academics who pine for equilibrium also are chagrined by inverted curves.  Soon we will have an academic at Treasury and a banker at the Fed and I doubt we will see an inverted curve again for a long while.

Stefan Jovanovich  writes:

CD's use of "renting money" to describe banking is, for this 19th century mind, a wonderful highlighting of the fundamental discontinuity between my favorite century and the present one.  People in the 19th century actually did rent money; loans were made in issues of actual currency - bank notes and coin.  That helps explain the seeming paradox of permanently inverted interest rates curves - where call loan rates would always be higher than the yields on 30 and 50 year private and U.S. Treasury debt.   Now that all debt payments are credit extensions (even payday lenders are "paid back" not in cash but in paper), are there any transactions that still have the moneyness that can be subject to panic?  

That seems to me to be at the heart of CD's comment.   


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