We Have Seen the Future and It's Japan?

      This seems to be the consensus we're hearing lately, the idea that in the long term we are going to look a lot more like Japan-Tyler Cowen's Great Stagnation thesis:

      "It’s beginning to look like Keynes was wrong about liquidity traps, at least when he argued that there’s a certain minimum nominal yield that government bond investors demand, and that long term rates can be reduced no further. Wherever people draw a line, bond yields just seem to plunge right through, to one record low after another. And we know from Japan that they can go even lower. But what does this mean?"

       "It probably means multiple things. For instance it suggests that the Keynesian/market monetarist AD pessimists and the Great Stagnation AS pessimists are both right. We are looking at BOTH low inflation and low real GDP growth for many years to come. Why don’t I think AD explanations are enough? Partly because even the 20 year T-bond now has a negative real yield. Indeed it suggests the Bernanke “global savings glut” hypothesis is also correct, a point I’ve argued previously. Japan is the future of the world."

       http://www.themoneyillusion.com/?p=15496

       Put aside the question of Sumner's claims about what Keynes said-you usually have to take anything Sumner says about what Keynes said with a grain of salt; recently he had claimed that Keynes hated fiat money, which is certainly not true.

      However, the point about nominal interest rates is true enough. We're not hitting any bottom. As Krugman wrote today:

     "Low interest rates on the bonds of just about every country that still has its own currency have created a small industry of would-be explainers. It’s a bubble; no, it’s the global shortage of safe assets; no, it’s “disaster economics“.

     "Maybe there’s some truth to some of these stories. But surely the dominant story is very simple: it reflects market perceptions that the economy is going to be depressed for a long time. As I’ve argued before, you really want to look at Japan, which exhibited this syndrome at a time when there was clearly no shortage of safe assets and few were talking about disaster."

      http://krugman.blogs.nytimes.com/2012/07/24/yield-stories/

     As far as Japan in particular, Marcus Nunes also has an interesting recent post about Japan's fall from an economy growing on steroids in the 50s and 60s-an average of 9.5% RGDP- to one growing at a slightly less spectacular level in the 70s and 80s-about 4.2% average- to it's Great Stagnation period since where it has seen only 0.9% RGDP.

     Interestingly, Marcus relates large part of Japan's fall to the move from the Bretton Woods system:

    
      "Among the industrial economies, Japan was especially vulnerable to fluctuations in the Yen/USD exchange rate for several reasons:

1) The dominant role of the dollar in Japanese exports and imports
2) The importance of the US as a trading partner
3) The fact that many Asian currencies were linked to the dollar

     "For those reasons there´s an expression in Japan – Endaya Fukyo – to designate growth recessions induced by yen appreciation."

      Krugman wrote yesterday that the lack of worry in Germany at the prospects of a Greek exit is a source of worry. Krugman's worry didn't take long to come to fruition as Germany now saw it's credit rating from Moody's cut. The Germans of course were so vain about their credit rating.

      A front page Wall St Journal headline underscores Marcus' point about Japan and its exchange rate:

      Japan Again Warns of Action Against Rising Yen