inversion of yield curve

"the stock market has correctly predicted 9 out of the last 5 recessions" - samuelson

inversion of the yield curve is generally seen to be indicator of a possible recession.

but this is precisely what interest rate tightening is meant to do right, cool off investment demand by making marginal projects unprofitable.

investment is in general 3x more volatile than output. an inversion of the yield curve is meant to cause savers to substitute away from long term treasuries to short term treasuries. this will cause the long term rate to rise, and make your marginal investment projects unprofitable.

however, in the open economy that we had, the inverted yield curve was able to last so long because of savings pouring in from everywhere else.

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