This phenomenon is usually viewed in reference to the long-term side of the equation. On the short-term side, it could be that rates are higher than they should be, given macroeconomic realities, due to a surfeit of supply.

Your very excellent question is whether the inversion is of itself of negative macroeconomic consequence. That is the case if it negatively affects consumption or investment or both — which it does.

It negatively affects both, but more immediately consumption (two-thirds or so of our GDP) because borrowing in that sphere is affected by higher short-term rates (i.e. borrowing for big-ticket items such as cars, appliances, furniture, etc. as well as the cost associated with using credit cards — with rates that are multiples of short-term rates— with more general affects). Higher short-term rates discourage purchases immediately and, if people do borrow anyway, take more of people’s incomes in the future to pay the higher rates of interest.

That of itself discourages investment for future production. Moreover, the lower returns on the long-term bonds that are used to fund such investment discourage their purchase, making funding such investment more difficult.

The inversion of rates could be a self-correcting process, by shifting the demand for bonds and re-adjusting rates accordingly, but the negative impact on the economy tends to generate recessions before that can happen. An ongoing oversupply of short-term debt makes the needed correction that much more difficult to achieve.

That is how continually creating too much supply of short-term debt is one way that the huge and growing deficits of the national government can hurt the economy. MMTers should especially take note.