Krugman and bad math

But when you cut the price of everything — which is more or less what happens when wages fall across the board — there’s nothing else to substitute away from.

Yes, economics textbooks typically show a downward-sloping “aggregate demand curve”. But the reasons for that curve’s downward slope aren’t the same as for your ordinary demand curve. It’s a process that works like this: lower prices -> lower demand for money -> lower interest rates -> higher spending. And that process doesn’t operate when, as is currently the case, short-term interest rates (which are the ones that matter for money demand) are zero. At the NYT again.

Krugman executing bad math again and relying on the so called Money Illusion.

The yield curve is the economy's best estimate of reserves required to prevent short falls. If we cannot substitute away from anything, then our required reserves of real goods remains the same, the yield curve does not adjust, it is a ratio. I don't care what the price of eggs are at the retail level, if no substitution take place, then the price of retail eggs retains the same factor as the wholesale price of a case of eggs.

Krugman relies on money illusion, the Keynesian thingy. Unfortunately, we have had an information revolution, and when the Fed thinks we are  in the age of television, but that age left about ten years ago. Hence, it is most likely that Krugman and the Fed suffer from the illusion, not the economy.

He gets Yglesias to believe the horse pucky, but we can expect no better from a Harvard graduate.  It is usually the economists who suffer the Money Illusion, the economy gets it by definition.