, 6 tweets, 2 min read Read on Twitter
1/4 To be clear on the #YieldCurve, as there's way too much discussion about its inversion and what it means when it's really simple. Since banks borrow at short-rates & lend (receive) long rates, if the yield curve inverts for an extended period of time, 2/4
2/4 banks will naturally restrict lending activity (as net interest margins, or "NIMs," will be negative and thus the banks would lose money making new loans). Credit conditions are the primary driver of short-term changes in aggregate demand. 3/4
3/3 Short-term economic performance is highly reliant on credit conditions. If banks tighten up and stop lending, overall spending falls and in turn the value of things like cars, houses, and capital equipment (often used to secure loans) falls in response to reduced demand. 4/4
When the yield curve inverts & short-term rates remain higher than long-term rates for a sustained period of time, this YIELD CURVE INVERSION CAN be a precursor to a recession. BUT, a recession is NOT A NECESSARY OUTCOME following a short-lived inversion in the curve.
@threadreaderapp please compile
@threadreaderapp To be clear, I am not referring to whether or not the conditions existing today and the yield curve's position today will lead to recession. I am merely trying to help explain the relationship for others' reference. Does not reflect my views on whether recession's coming.
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