all those cash deposits sitting in banks?
Wikpedia -
Deflation:
In economics, deflation is a decrease in the general price level of goods and services.<1> Deflation occurs when the inflation rate falls below 0% (a negative inflation rate). This should not be confused with disinflation, a slow-down in the inflation rate (i.e. when inflation declines to lower levels).<2> Inflation reduces the real value of money over time; conversely, deflation increases the real value of money – the currency of a national or regional economy. This allows one to buy more goods with the same amount of money over time.
Economists generally believe that deflation is a problem in a modern economy because of the danger of a deflationary spiral (explained below).<3> Deflation is correlated with depressions – including the Great Depression, as banks defaulted on depositors. Additionally, deflation may cause the economy to enter a liquidity trap. However, historically not all episodes of deflation correspond with periods of poor economic growth.<4>
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A deflationary spiral is a situation where decreases in price lead to lower production, which in turn leads to lower wages and demand, which leads to further decreases in price. Since reductions in general price level are called deflation, a deflationary spiral is when reductions in price lead to a vicious circle, where a problem exacerbates its own cause. The Great Depression was regarded by some as a deflationary spiral. Whether deflationary spirals can actually occur is controversial, with its possibility being disputed by Austrian school libertarian economist Robert Higgs.
A deflationary spiral is the modern macroeconomic version of the general glut controversy of the 19th century. Another related idea is Irving Fisher's theory that excess debt can cause a continuing deflation.
http://www.dogpile.com/info.dogpl/search/web?q=deflation----------
Can Deflation Be Prevented? (Krugman)
This week's cover story in The Economist makes it more or less official. Deflation, not inflation, is now the greatest concern for the world economy. Over the past year, producer prices have fallen throughout the advanced world; consumer prices have been falling for the last 6 months in France and Germany; in Japan wages have actually fallen 4 percent over the past year. Until the recent crisis prices were falling in Brazil; they continue to fall in China and Hong Kong; they will probably soon be falling in a number of other developing countries.
So far, none of these price declines looks anything like the massive deflation that accompanied the Great Depression. But the appearance of deflation as a widespread problem is disturbing, not only because of its immediate economic implications, but because until recently most economists - myself included - regarded sustained deflation as a fundamentally implausible prospect, something that should not be a concern.
The point is that deflation should - or so we thought - be easy to prevent: just print more money. And printing money is normally a pleasant experience for governments. In fact, the idea that governments have a hard time keeping their hands off the printing press has long been a staple of political economy; dozens of theoretical papers have argued that the temptation to engage in excessive money creation causes an inherent inflationary bias in fiat-money economies. It is largely to combat that presumed bias that most of the world has accepted the notion that monetary policy should be conducted by an independent central bank, insulated from political influence - and has written into the charters of those central banks that they should seek price stability as their main, often only, goal.
Yet here we are, with deflation turning out to be a serious problem after all - and with policymakers finding that it is not as easy either to prevent or to reverse as we all thought.
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And this is where I get nervous. This nervousness is not because the idea of fighting deflation by promising inflation is crazy: it is in fact a straightforward conclusion from quite standard models. Indeed, once one admits that deflationary pressures come from the persistence of a savings-investment gap even at a zero interest rate, it is hard to see how this conclusion can be avoided. But the idea sounds crazy, and that is a problem. How can we get finance ministers and central bankers, who have spent their whole careers preaching the evils of inflation and the virtues of price stability, to accept the idea that price stability may not be an available option?
For if deflationary forces are as powerful as they are in Japan - and may soon be in the rest of the world, if The Economist is right - there is no middle ground. Either policy gives the economy the inflation expectations it needs, or the economy will try to get that inflation via grinding deflation - a proposition that sounds paradoxical but is actually a matter of simple economic logic. Attempts to find a halfway house - to aim merely for stable prices rather than sufficiently high inflation - will be doomed to failure.
cont'd
http://web.mit.edu/krugman/www/deflator.html-----
Why Is Deflation Bad? (NYT/Krugman 2010)
http://krugman.blogs.nytimes.com/2010/08/02/why-is-deflation-bad/
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