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.