The Debt Limit and the Yield Curve
don't hold your breath
I don’t know nuffink about the federal debt limit that is in the news today. I am just supremely confident that our leaders will compromise at some point in an outrageous deal that spends our money on their power.
But I am more concerned about the federal Yield Curve. The Yield Curve is a graph of all federal debt securities by maturity, from 1 month to 30 years. Here is today’s yield curve that I got from usgovernmentspending.com. It is based on the US Treasury’s Yield Curve page for January 2023. You can see the maturity for each security all along the bottom.
To make it “real simple” so Sen. Iselin could understand, there are two things to understand about the Yield Curve.
When the Fed is fighting inflation, as right now, you tend to get an “inverse yield curve” where the interest rate goes down as the maturity increases.
When the Fed is fighting recession, you tend to get a “normal yield curve” where the interest rate goes up as the maturity increases.
What does a normal yield curve look like? I’m glad you asked, Senator. It looks like this:
Notice the date — April 1, 2009, in the very depths of the Great Recession of 2007-08.
The rule of thumb is that when the Fed is fighting inflation and engineers an inverse yield curve it is setting the nation up for recession. But not right away. Look at this yield curve, for November 2006.
Guess when the recession started. Not till the third quarter of calendar 2007.
So. Right now, on January 19, 2023, there is not yet a “pure” inverse yield curve where the yield go down for each increasing maturity. But if the Fed increases its Fed Funds rate another half point to 5.0% then I think the yield curve will go fully inverted.
Does that mean we are going to have a recession? And does the steeper inversion of the current inverted yield curve relative the the November 2006 yield curve mean that the next recession will make the Great Recession of 2007-08 look like a walk in the park?
I have no idea. But if I were captain of the Yankee clipper US America down in the Roaring Forties of the Southern Ocean I would be shortening sail and battening down the hatches right about now.
And another thing. Our Democratic friends have been putting pedal to the metal on the spending front for the last two years, which the Fed went along with until it started raising rates starting in March-April 2022.
So you could say that right now President Biden and the Democrats have their feet on the gas pedal while Fed Chairman Jerome Powell has his foot on the brake pedal.
Generally speaking, experts agree, an automobile brake is stronger than the engine on the automobile. But if the brake pads get so hot that the brake fluid bursts into flame…
Just between you and me, I don’t think that this is going to end well. And I wouldn’t be surprised if the literary agent for Michael Lewis is busy shopping publishers for a book with the working title “The Big Short Part II.”
But the fact is that nobody knows nuffink.