2. The implications of a sharp decline in the yield spread are far different from the implications of an outright inversion of the yield spread.\u00a0 This is important, as the following graph demonstrates that the yield spread has recently declined sharply, but remains positive:<\/p>\n
![\"\"](\"https:\/\/blue-sea-697d.quartiers047.workers.dev:443\/https\/www.econlib.org\/wp-content\/uploads\/2018\/07\/Screen-Shot-2018-07-30-at-12.13.49-PM.png\")
There were similar sharp declines in the yield spread in 1977, 1984, and 1994, and yet in each case there was no recession in the near future.<\/p>\n
3.\u00a0 The yield spread is not a particularly good indicator of whether money is too tight.\u00a0 Consider the following two yield spreads:<\/p>\n
February 2006:\u00a0 minus 0.14%<\/p>\n
December 2007:\u00a0 positive 0.99%<\/p>\n
The February 2006 inversion did not indicate that money was too tight at that point in time.\u00a0 In contrast, money was clearly too tight in December 2007, and yet the yield spread was about normal, which is roughly 1%.<\/p>\n
The yield spread also inverted in June 1998, and yet money was not too tight at that time.\u00a0 Nor was money too tight in January 1989, when the yield curve inverted.\u00a0 And obviously money was not too tight in the late 1970s.\u00a0 Don’t make the mistake of equating “yield curve is inverted” with “money is currently too tight”.<\/p>\n
The best measure of whether money is too tight is the Hypermind NGDP prediction market price.\u00a0 And that’s a really, really sad comment on the failure of our policymakers, as well as the economics profession as a whole.<\/p>\n