Do Inverted Yield Curves Predict or Cause Recessions
This is a common debate among economists. Economic theory argues that when the cost of capital exceeds the return on capital, then capital flows slow. This makes intuitive sense if one thinks about the role banks play in the flow of capital. When deposit rates meet or exceed the rates on loans they issue, then obviously it makes no sense to either attract deposits or make loans. This effectively crimps the supply of capital for companies to expand, thus potentially causing a slowdown in the economy. On the other side, lower long term rates allow consumers to refinance debt, or take on more debt, potentially leading to a pickup in consumption. I would point to this weeks release of consumer debt. Then there is the affect on consumption due to severe stock market declines, and the subsequent effect on consumer psychology and consumption. I don't know that the answer is simple. The consumer is the key to the future, and as well all know, predicting human behavior is difficult at best.