Barron's Nonsensical Idea: Cut Rates Like Mad to Avoid Recession

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Barron's writer Matthew Klein proposes to stop the recession by cutting interest rates like it’s 1995.

Kleion says How to Avoid a Recession? Cut Interest Rates Like It’s 1995.

One of the most reliable harbingers of U.S. recession—short-term interest rates on U.S. Treasury debt higher than longer-term yields—has been flashing warning signs for months. That doesn’t mean the economy is doomed to a downturn.

So-called yield-curve inversions have preceded every U.S. downturn since the 1950s, with only one false positive in 1966. This past week, the yield on two-year Treasuries briefly surpassed the yield on 10-year notes for this first time since 2007. The most straightforward explanation is that traders...

Absurd Notion

The rest of the article is behind a paywall, but I can tell you with 100% certainly Klein's notion is absurd.

Inverted yield curves do not cause recessions. They are symptoms of a buildup of excess debt or other fundamental problems.

Those problems will not not go away if the Fed "cuts rates like 1995" or even like 2008.

If a zero percent interest rate stopped recessions, Japan would not have had a half-dozen recessions in the past decades that it did have, many without inversions.

Not even negative rates can stop recessions.

The Eurozone, especially Germany, has negative rates. Yet, it's highly likely the Eurozone is in recession now and even more likely Germany is (with the rest of the Eurozone to follow).

Monetary Madness

As a prime example of global monetary madness, witness Inverted Negative Yields in Germany and Negative Rate Mortgages.

Even if the Fed made a 100 basis point cut (four quarter point cuts at once), what the heck would that do?

Stop recession for how long? Zero months? Six months? And at what expense?

What Then?

Yes, what then? Negative mortgages? A 10-year yield of -1.0% like Switzerland.

And if that doesn't work?

Hello @M_C_Klein What then?

Central banks are the source of problems, not the cure. If central banks could stop recessions, there never would be any!

Mike "Mish" Shedlock

Comments (41)
No. 1-16
Sechel
Sechel

Seems like nobody has ever heard of Smoot-Hawley. Want to stop the world economies from imploding stop with the tariffs and quotas. A 2% Treasury is not a cure but a symptom of things gone wrong.

Sechel
Sechel

The only thing responding to lower yields are CFO's engaged in financial engineering of the balance sheet and the CDO machine. Other than that you may see a muted effect from borrowers remortgaging their homes but we've gone through so many cycles of this it won't be much

2banana
2banana

This business will get out of control. It will get out of control and we'll be lucky to live through it.

Admiral Josh Painter

shamrock
shamrock

The theory is that inverted yield curves do cause recessions because banks borrow short term and lend long term. If they can't do that profitably they then stop lending, credit stops expanding, and the economy shrinks.

hmk
hmk

The tariffs are not what is causing the yield curve to invert. TDS people would like to think so. AS I have pointed out before a 25% tariff on $600 billion of Chinese imports is an increase in costs of $150 billion out of a $20 trillion economy. Really do any of the TDS people use facts before they spout off? The yield curve is primarily inverted because there are $15 trillion in negative yields govt bonds. This drives up the price of our bonds primarily the long bonds there is an increase in demand from those fleeing negative yields. No recession in sight. Ask any business their number one problem is not enough labor particularly skilled.