What price is wrong?
Krugman tries to distinguish between Austrians vs Monetarists as two groups arguing about what is being priced incorrectly. The assumption is that something is price incorrectly because we have a market which is failing to clear (unemployment):
As I see it, the whole structural/classical/Austrian/supply-side/whatever side of this debate basically believes that the problem lies in the labor market. (I know, the Austrians will deny it — but it doesn’t matter what you say about their position, any comprehensible statement leads to angry claims that you don’t understand their depths). For some reason, they would argue, wages are too high given the demand for labor. Some of them accept the notion that it’s because of downward nominal wage rigidity; more, I think, believe that workers are being encouraged to hold out for unsustainable wages by moocher-friendly programs like food stamps, unemployment benefits, disability insurance, and whatever.
As regular readers know, I find this prima facie absurd — it’s essentially the claim that soup kitchens caused the Great Depression. But let’s stick with the economic logic for now.
So what’s the alternative view? It’s basically the notion that the interest rate is wrong — that given the overhang of debt and other factors depressing private demand, real interest rates would have to be deeply negative to match desired saving with desired investment at full employment. And real rates can’t go that negative because expected inflation is low and nominal rates can’t go below zero: we’re in a liquidity trap.My question is, suppose what's wrong is that there are insufficient Net Financial Assets (Equity) to supply the demand for private sector savings (broadly, and precisely defined)? In this model, the extra required savings, at the sector level, aren't available for any price and so the market doesn't clear. Deflation doesn't help, because it makes real debt burdens worse, and low interest rates don't help because ameliorate and exacerbate the issue at the same time.