I FINALLY fixed the problem on Pugix's blog where the "more recent posts" wasn't paginating properly to older posts. Sadly, my question was ignored on the WordPress forum.
I found the answer in this WordPress documentation codex page, Making Your Blog Appear in a Non-Root Folder.
I *did* have to create a new template. The key was this: the posts.php template isn't a display template, it just generates the query, then loads the display template, index.php. So happy!
A Little Further into Bas-Lag
2 days ago