Probability of an inverted yield curve
An inverted yield curve is the opposite of a steep yield curveCarpe Diem wants me to explain how and why we might have a double dip. The NY Fed posts the relationship between the banker's yield curve and recession, above. The steeper the curve the less likely it will invert. An inverted Yield Curve is a recession. What can cause the yield curve to suddenly invert?
It is the second moment, not the first moment that contrarians are concerned with. The first moment tells us how far we are from inversion, the second moment tells us how fast we can change from steep to inverted. Between 1992 and 2001, we spend eight years in growth, no recession. Between 2001 and 2008 we spent six years in growth before inversion. The rate of change between inversion and steepness is increasing. The economy is learning more about what ails it as time progresses. It has been one and a half years since the crash, the economy is likely much better at passing the constraints up to the next level in production and the question is whether that knowledge is much more efficiently passed up the chain then before.
Dot com tried to solve the constraint, and ran to its limits. Housing took up the baton and tried to solve the constraint, and reached its limits. Who is next up the production chain? Government, or specifically Treasury. If Treasury and Congress reaches its limits then we will quickly see a collapse of long term yields and a jump in short term interest rates, the start of another leverage cycle.
How fast can government drive up inflation?Economists have been deceived by the relative stability of inflation over the past 15 years. They have been deceived because government budgets have not been sorely tested in the past 15 years, there has always been debt capacity to bail us out.
But, but...
How can I take Caplan's bet against Mish but take Mish's bet against Carpe Diem? Simple, I predict out to the third moment! First the double dip due to government equalization of budgets, then within five years the new technology provides a win for Caplan. Multi-modal betting.
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