Why Recession Happens After Yield Curve Normalizes

Find out here. At least if I'm right. If I'm wrong, then find out somewhere else.

The effect of inverted yield curve on bones.

Why "Recessions" Happen After the Yield Curve Normalizes

I was asked to deal with this question. I think I have an answer but I'm not 100% on it. I'm starting my reasoning here with the assumption that inverted yield curves do not happen in finance in its natural state. If interest is higher short term than long term, that means everyone is immortal and has no time preference. The reason we demand more interest for loaning out money longer term is that we are all going to die, and so our time is an economic good, and must therefore be rationed.

An inverted yield curve suggests we are all immortal, which is demonstrably false, and so something else must be going on here. That something else is the central bank which yanking on short term interest rates trying to apply the breaks to the economy. But the long term isn't buying it because those holding long term debt securities know full well that the same bank yanking on short term rates is going to have to buy all that debt anyway, and so they don't sell at high enough rates.

What ends up happening is a severely warped time preference scale that reflects the reality that everyone knows the Fed is going to have to print again and they're all daring it to. Then what happens is initial signs of recession appear, and the Fed starts cutting, which is what they're going to in September, who knows by how much, depends on how extreme the situation is by then. Meaning, the yanking they're doing on the short end gets looser and short term rates start fall lower than long term rates.

My thinking is not that a normalized yield curve after a period of inversion necessarily causes a recession by itself. It's not a causal relationship here as far as I can tell. It's just a coincident indicator that the Fed has already pivoted which means a recession is already gathering and the Fed won't be able to stop it.

To confirm my theory here, I'd have to see yield curves going back hundreds of years. Anyone know where I can get that? If I'm right, inverted curves happen if and only if a sufficiently powerful inflationary force (doesn't necessarily have to be a central bank, it could be a government clipping coins and then restoring their silver content after a period of inflation or something like that) is messing with the money supply to such an extent that it makes everyone look immortal even though they keep dying and getting buried. Or not. But you get the point.

October Looking More Likely for RRP Zeroing Out

Bloomberg reported on the quarterly refunding announcement and this paragraph is key: