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.
Here is more. And this:
The rate of nominal GDP growth in the US over the past 3 years has been above 4%, which is considerably higher than in Japan. I would have thought that might well be enough. (The fact that it wasn’t makes me think Japan is light years away from exiting the zero bound.)