Editing Deflation (section)

==Counteracting deflation==
During severe deflation, targeting an interest rate (the usual method of determining how much currency to create) may be ineffective, because even lowering the short-term interest rate to zero may result in a real interest rate which is too high to attract credit-worthy borrowers. In the 21st-century, negative interest rates have been tried, but it cannot be too negative, since people might withdraw cash from bank accounts if they have a negative interest rate. Thus the central bank must directly set a target for the quantity of money (called "[[quantitative easing]]") and may use extraordinary methods to increase the supply of money, e.g. purchasing financial assets of a type not usually used by the central bank as reserves (such as [[Mortgage-backed security|mortgage-backed securities]]). Before he was [[Chairman of the Federal Reserve|Chairman]] of the United States [[Federal Reserve System|Federal Reserve]], [[Ben Bernanke]] claimed in 2002, "sufficient injections of money will ultimately always reverse a deflation",<ref>[http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm "Deflation: Making Sure 'It' Doesn't Happen Here"] {{Webarchive|url=https://web.archive.org/web/20081024060408/http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm |date=2008-10-24 }}. Remarks by Governor Ben S. Bernanke before the National Economists Club, Washington, D.C., November 21, 2002. Federal Reserve.</ref> although Japan's deflationary spiral was not broken by the amount of quantitative easing provided by the Bank of Japan.

Until the 1930s, it was commonly believed by [[classical economists|economists]] that deflation would cure itself. As prices decreased, demand would naturally increase, and the economic system would correct itself without outside intervention.

This view was challenged in the 1930s during the [[Great Depression]]. [[Keynesian economics|Keynesian economists]] argued that the economic system was not self-correcting with respect to deflation and that governments and central banks had to take active measures to boost demand through tax cuts or increases in government spending. Reserve requirements from the central bank were high compared to recent times. So were it not for redemption of currency for gold (in accordance with the gold standard), the central bank could have effectively increased money supply by simply reducing the reserve requirements and through [[open market operations]] (e.g., buying treasury bonds for cash) to offset the reduction of money supply in the private sectors due to the collapse of credit (credit is a form of money).

With the rise of [[monetarism|monetarist]] ideas, the focus in fighting deflation was put on expanding demand by lowering interest rates (i.e., reducing the "cost" of money). This view has received criticism in light of the failure of accommodative policies in both Japan and the US to spur demand after stock market shocks in the early 1990s and in 2000–2002, respectively. [[Austrian economists]] worry about the inflationary impact of monetary policies on asset prices. Sustained low real rates can cause higher asset prices and excessive debt accumulation. Therefore, lowering rates may prove to be only a temporary palliative, aggravating an eventual debt deflation crisis.

===Special borrowing arrangements===
When the central bank has lowered nominal interest rates to zero, it can no longer further stimulate demand by lowering interest rates. This is the famous [[liquidity trap]]. When deflation takes hold, it requires "[[quantitative easing|special arrangements]]" to lend money at a zero nominal rate of interest (which could still be a very high ''real'' rate of interest, due to the ''negative'' inflation rate) in order to artificially increase the money supply.

=== Capital ===

Although the values of [[capital asset]]s are often casually said to deflate when they decline, this usage is not consistent with the usual definition of deflation; a more accurate description for a decrease in the value of a capital asset is [[Depreciation (economics)|economic depreciation]]. Another term, the [[depreciation|accounting conventions of depreciation]] are standards to determine a decrease in values of capital assets when market values are not readily available or practical.