In a long column that basically cuts against my view of the world Steve Pearlstein mentions

The global financial system teeters on the edge of collapse because European politicians refused to tell citizens of their crumbling economies that they could no longer guarantee them “la dolce vita” – the sweet life – they had come to expect.

Taken at face value this statement is somewhat true. However, Pearlstein backs it up with the more traditional notion that:

. . . that’s how it seemed at the time to the political leaders of Greece and Italy, who couldn’t imagine a world where public employees couldn’t retire at 55.

But, of course public employees retireeing at 55 can’t itself be the source of global financial collapse or indeed any type of macro-economic instability.

Instead, the source of our problems  is the inability of the Italian and Greek currency to fall in value.

And, that should make perfect sense if you think about the story you are telling here. If you people are trying to buy more of “la dolce vita” than they are willing to produce then what should happen to “la dolce vita”?

Its price should rise.

That is to say scooters, cappuccinos, leather shoes, gelato – the material elements of “la dolce vita”  – should all become more expensive. When that happens people will buy less.

As it happens the market will work towards equilibrium both ways. The demand for Greek and Italian labor will rise as well. Retiring at 55 will seem like a less good idea both because it buys less “la vita dolce” and because the opportunities to continue working will expand.

However, this cannot happen. And, it cannot happen because the European Central Bank refuses to let prices rise. It refuses to say that a Euro today just can’t go as far as a Euro yesterday because there is just not enough Europe to go around.

Without this adjustment real wages can’t fall, the price of “la Vita Dolce” can’t rise and demand for Greek and Italian labor cannot increase.

I can’t hammer this home enough. A recession is not when something bad happens. A recession is not when people are poor.

A recession is when markets fail to clear. We have workers without factories and factories without workers. We have cars without drivers and drivers without cars. We homes without families and families without their own home.

Prices clear markets. If there is a recession, something is wrong with prices.