How to Flip a Yield Curve

It&#x27;s a strange time.<p>On one hand, the Fed is right that the US economy is strong and does not need stimulus.<p>On the other hand, treasuries are a <i>global market</i> now. And the US is pricing its debt at <i>insanely high rates</i> given that all other advanced, stable economies are paying zero <i>or less</i>. This is leading to capital world-wide gobbling up as much long term US debt as possible, and inverting the curve.<p>The best path forward would be for the Fed to lower rates closer to market, based on the US&#x27;s peers, like Europe and Japan. And for the Federal Government to raise taxes gradually (they already are doing this in a sense with tariffs) and lower spending -- so they can react to any future recession with stimulus.<p>The Fed can act unilaterally, but the harder part is for Congress to put a little money away for a rainy day.

The more interesting question is, how low can interest rates go? We’re still in an economic expansion and interest rates are already the lowest they’ve been in history. How far negative can we push them when the expansion finally ends? (Seriously asking, I’m not an economist).<p>I mean it looks for all I can see like something is really, really screwy about the whole world economy right now. Banks are charging for storing people’s money and paying to give it away in Denmark. That does not sound like a solvent financial system. It’s like when you’re trying to get sound out of your stereo and you can’t hear anything, so you turn every knob up all the way, then you notice, oh, this cable is unplugged, and you jiggle it and blam, blow the speakers out. Or in Chernobyl, where they backed the control rods way out but then turned up a bunch of other stuff, getting a very slow reaction but in an extremely unstable state that suddenly went exponential when they tried to shut it down. It just feels like the system is, in some sense, <i>upside down</i>. But, I am not an expert.

&gt; It was, therefore, just a matter of time before the discovery that inverted yield curves often anticipate recessions resulted in the world’s first yield-curve induced panic<p>This is backwards from what I understand. It&#x27;s the bond market pricing in an economic downturn (lowering of interest rates in the medium term)that inverts the yield curve. The yield curve is how the bond market &quot;speaks&quot;. The author seems to be implying the yield curve is some kind of enigmatic, second-order effect not an explicit result of the bond markets view of the economy.