As Bernanke pointed out, the problem with deflation is that you can't have negative interest rates, as people would withdraw their deposits and hold cash "under the matress". If interest rates remain high in real terms, people are inclined to save and not to spend, causing economic activity to contract further (Keynes' Paradox of Thrift).
There are some who have suggested encouraging people to spend by canceling, with a certain notice period, a certain percentage of notes in circulation (pick a number from 0-9 and cancel all notes whose serial number ends with that number - just don't tell anyone in advance what the number is).
Why not go a (big) step further and cancel, say, 10% of bank deposits? Not only would spending be encouraged, boosting the economy, but the canceled bank deposits would become bank equity, thus helping to recapitalise banks.
In recent decades we have increasingly confused money with wealth. Nowadays, money is seen as a means unto itself. This should be actively discouraged, using aggressive tactics if necessary.
Published on The Centilliard
The views expressed in this communication are those of Peter Elston at the time of writing and are subject to change without notice. They do not constitute investment advice and whilst all reasonable efforts have been used to ensure the accuracy of the information contained in this communication, the reliability, completeness or accuracy of the content cannot be guaranteed. This communication provides information for professional use only and should not be relied upon by retail investors as the sole basis for investment.
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