What the heck is an inverted yield curve? Let's start with a basic yield curve. This is defined as a graph "showing the term structure of interest rates by plotting the yields of all bonds of the same quality with maturities ranging from the shortest to the longest available," according to Barron's Dictionary of Business Terms (Barron's Educational Series; 1994). An inverted yield curve is an "unusual situation where short-term interest rates are higher than long term rates."
Does that mean a recession is coming? On Aug. 14, National Public Radio reported, "The yield on the benchmark 10-year Treasury note fell below 2-year Treasury (notes) for the first time since 2007. In other words, you would get a higher interest rate for government debt that matures in two years than in 10 years." The news organization explained that "each of the last seven recessions, dating to 1969, was preceded by the 10-year falling below the two-year."
So, are there other clues that tell us the country is headed for a recession? This week, Bank of America noted that "three of five economic indicators that track business cycles — auto sales, industrial production and aggregate hours worked — are at levels reached right before previous recessions," according to a CNBC report.What's the difference between a recession and an economic depression? A depression is a more sustained economic crisis. Barron's defines it as an "economic condition characterized by a massive decrease in business activity, falling prices, reduced purchasing power, an excess of supply over demand, rising unemployment, accumulating inventories, deflation, plant contraction, public fear and caution."
Is there anything we can do about it? An article about recessions on the Economic Policy Institute website notes that the "common root cause of each recession is a contraction of economywide spending (or aggregate demand) relative to the economy’s potential productive capacity. As consumers (households, businesses, or governments) cut back their spending, it doesn’t make sense for producers to keep generating as much economic output."To know more:
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