Thursday, July 8, 2010

Andean cosmovision and the yield curve

The cosmovision

"IF YOU'RE making a call on a double-dip recession, you must also make a call on the credibility of the yield curve. An inverted curve (with the ten-year Treasury yield falling below the three-month T-bill rate) has preceded each of America's last seven recessions. It has had two false positives, in 1966 and 1998, the Cleveland Fed notes. The lead time varies from a few months to two years. It is currently relatively steeply upward sloping.

"Is this time different? By definition, when short-term rates are at zero as they are now, the yield curve can’t invert, yet it would be ridiculous to say that means we can’t have a recession. A correspondent points out that Japan’s yield curve was positively sloped throughout the 1990s but Japan still had recessions.

"With that caveat in mind, for now I’m going to trust the yield curve..."

And now
, as my English literature exams used to instruct; "discuss".

h/t salmon