Matt Rognile argues that they don’t

So yes, deleveraging can be very bad for the economy. But this is only because monetary policy doesn’t adjust enough to match the market.

In failing to understand this core logic, most commentary about “deleveraging” is rather bizarre. At some level, it’s the same cluelessness that we once saw from central planners: they’d trip over themselves in the complexity of fixing a shortage in one market or a glut in another, never quite realizing that the price mechanism would do their work for them. Right now, historically low inflation expectations and below-potential output are prima facie evidence that real interest rates are too high. That’s what every macro model tells us is associated with contractionary policy by the Fed. Yet we see pundits lost in all kinds of complicated, small-bore proposals to stimulate the economy—when the fundamental, overriding dilemma is getting the price (in this case, the interest rate) right.

I don’t think this is quite right. The overwhelming problem in the economy is that real interest rate is too high and this is caused our cyclical sectors to see contraction and a weak recovery.

However, we would still be having balance sheet problems even if the real interest rate could fall further.

To put it another way, a balance sheet recession raises the NAIRU, by altering the relationship between Aggregate Demand and spending in non-cyclical sectors.

Now, I think Matt and I would agree that the proper response to this is to accept higher inflation. However, it is important that all of the work cannot be done by the interest rate alone even if we weren’t running into the zero lower bound.

The distribution of debt and assets has to change or else the NAIRU will rise.

However, yes to be perfectly clear, the perception that you just can’t do anything about unemployment because it’s a balance sheet recession strikes me as deeply wrong.