I get to teach Public Affairs 854, “Macroeconomic Policy and International Financial Regulation” and Economics 435 “The Financial System” this fall. There’s a cosmic confluence this year, in terms of the subject:

Figure 1: 10yr-3mo term spread in %, lagged one year (blue, left scale), and Q/Q growth rate SAAR, in % (red), and forecasted using spead, time trend over 1986-2019Q2 (green). 2019Q3 is July data. NBER recessions shaded gray. Forecast period shaded light green. Source: Federal Reserve via FRED, BEA 2019Q2 advance release, NBER and author’s calculations.

Figure 2: 10yr-3mo term spread in % (blue, left scale), and implied probability of recession, in % (red), probabilities estimated using probit on 10yr-3mo term spread estimated over 1986-2019M07. NBER recessions shaded gray. Forecast period shaded light green. Source: Federal Reserve via FRED, NBER and author’s calculations.

I’ve got a feeling that if not recession, then flagging growth, will be topics moved up in the syllabi in each course. In PA854, the international dimension will emphasized (and there, look at this scary picture):

Figure 3: 10yr-3mo spreads, in %, as of December 14, 2018 (light blue bar), and as of August 9, 2019 (red bar). Source: Reuters, Bloomberg, TradingEconomics, and author’s calculations.

and this graph:

Source: Merk.

Spreads have gone negative in most other advanced economies, and PMI diffusion indices are even as I write moving toward negative. I’ll talk about the two country Keynesian model reinforcing the downdraft, in PA854.

For Economics 435, well I’ll talk about expectations, uncertainty, and asset prices. One example will be to show how given a pecking order of finance, vast amounts of cash/retained earnings won’t be sufficient to offset sufficiently high levels of uncertainty.

Figure 4: Shortfall in equipment investment, in bn.Ch.2012$ SAAR (blue, left scale), trade policy uncertainty (brown, right scale). Light orange shading denotes TCJA in effect. Predicted investment using first difference equipment investment on current and lag of first difference GDP and first difference of real interest rate, 09Q2-2016Q. Source: BEA 2019Q2 advance release, policyuncertainty.com, and author’s calculations.