Home > Economics > Andy Harless, on recessions

Andy Harless, on recessions

From the comments section over at Modeled Behavior:

I’m with you up to “something is wrong with prices,” but where did we get the premise that the price that has something wrong with it must be the real wage.  I would suggest the possibility that real wages are a side show and that the price that is out of whack is the real interest rate.  Inflation targeting sets a floor on the real interest rate, so if the natural interest rate goes below the negative of the inflation rate, the central bank will (and rightly so, because the cure would be worse than the disease) strongly resist any movement toward equilibrium via adjustments in current prices relative to expected future prices.  In theory maybe you could work around this problem by having a huge decline in the real wage, but that would throw other things out of whack.  The underlying problem is excessive patience.

If you don’t already, you should follow him on Twitter. Here’s a post from him back in November, making the same point. Here is Karl Smith on the logistical difficulties of saving, my favourite post of the year.

About these ads
Categories: Economics
  1. steveroth
    April 28, 2012 at 4:06 pm

    I posted this over there, but a little comment love here doesn’t hurt…

    It really seems that these anomalies must have something to do with the extraordinarily levels of UK private debt.

    http://yfrog.com/nto95hp

    A great deal of producers’ “revenue is paid” to creditors. I don’t feel totally comfortable with the notion that those flows are “leaking” out of the real economy (purchase/sale of produced and at-least-ultimately consumable goods and services, including fixed assets), but I don’t think it’s far off.

    • April 29, 2012 at 11:46 am

      Steve,

      I’m not sure enough about this yet to upgrade it to a full blog post, but I think we need to be careful about interpreting the significance of financial sector debt. London is a global financial centre, and the flipside of that ‘debt’ is the funding of lending all over the world. So comparing it to UK GDP and thinking ‘how on earth are we going to pay for that?’ may be misleading, as the people who will hopefully be ‘paying for it’ is the people we’ve lent it to. Where this *does* cause a problem for us is when we have to bail them out, as our banks are huge. I think the financial sector debt of the UK (compared to the US) mostly represents the fact that almost all of our internal lending is done by UK banks and UK banks do a lot of foreign lending. I don’t think this debt represents claims on the UK private sector in anything like the way household and nonfinancial corp debt does. But I could well be wrong.

  2. September 17, 2014 at 2:57 am

    I’m not sure exactly why but this blog is loading very slow for me.
    Is anyone else having this issue or is it a issue on my
    end? I’ll check back later and see if the problem still exists.

  1. No trackbacks yet.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s

Follow

Get every new post delivered to your Inbox.

%d bloggers like this: