Turning Japanese, turning Japanese, I think so

By Dave Anderson:

Barry Ritholtz has some depressing calculations on the assumption that the US Treasury bond market is a mostly efficient future discounting mechanism:

The current 2.5% yield on the US 10 year bond is clearly a long way
short of this. So unless you believe that Japan is correct template for
the US (i.e. inflation will be zero for the next decade), government
bonds don�t offer an attractive return as a buy and hold proposition.

Another way of looking at this problem is to ask how much weight
the market is putting on a �Japanese� outcome. Let�s assume three
states of the world (a gross simplification, but convenient). In the
�Normal� state of the world bonds sit at close to equilibrium, say
4.5%. Under a �Japanese� outcome yields drop to 1%, and under an
inflation outcome yield rise to 7.5% (this assumes a 5% inflation
rate).

The table below lays out my own estimates (kind of an agnostic view,
with a prior biased towards the �Normal� but cognizant of the other
two risks), then bond should yield around 4.4%. I can then tinker
around with the probabilities to generate something close to the
market�s current pricing. In essence, the market is implying a
70% probability that the US turns Japanese.

Given Keynesian economics are discredited because the Obama Administration wimped out and went for necessary but definitely insufficient policies, and the Republicans fully embracing Hoover/Mellonism, 70% chance for another lost decade looks about right to me.  We'll see austerity tried from 2011 to 2016 before there is another chance at a significant fiscal stimulus.