Earlier I sent a message on Bernanke and deflation.
Here is more detail in the matter:
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Bernanke's full thought experiment that tells how to
prevent depression caused by deflation NOT inflation:
... under a fiat (that is, paper) money system, a government
(in practice, the central bank in cooperation with other
agencies) should always be able to generate increased
nominal spending and inflation, even when the short-term
nominal interest rate is at zero. The conclusion that deflation
is always reversible under a fiat money system follows from
basic economic reasoning. A little parable may prove useful:
Today an ounce of gold sells for $300, more or less.
Now suppose that a modern alchemist solves his subject's
oldest problem by finding a way to produce unlimited
amounts of new gold at essentially no cost. Moreover,
his invention is widely publicized and scientifically verified,
and he announces his intention to begin massive production
of gold within days. What would happen to the price of gold?
Presumably, the potentially unlimited supply of cheap gold
would cause the market price of gold to plummet. Indeed, if
the market for gold is to any degree efficient, the price of gold
would collapse immediately after the announcement of the
invention, before the alchemist had produced and marketed a
single ounce of yellow metal.
What has this got to do with monetary policy? Like gold,
U.S. dollars have value only to the extent that they are strictly
limited in supply. But the U.S. government has a technology,
called a printing press (or, today, its electronic equivalent),
that allows it to produce as many U.S. dollars as it wishes at
essentially no cost. By increasing the number of U.S. dollars
in circulation, or even by credibly threatening to do so, the
U.S. government can also reduce the value of a dollar in
terms of goods and services, which is equivalent to raising
the prices in dollars of those goods and services.
We conclude that, under a paper-money system, a determined
government can always generate higher spending and hence
positive inflation.
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Bernanke's conclusion in his original speech:
Conclusion
Sustained deflation can be highly destructive to a modern
economy and should be strongly resisted. Fortunately, for
the foreseeable future, the chances of a serious deflation in
the United States appear remote indeed, in large part because
of our economy's underlying strengths but also because of the
determination of the Federal Reserve and other U.S. policy-
makers to act preemptively against deflationary pressures.
Moreover, as I have discussed today, a variety of policy
responses are available should deflation appear to be taking
hold. Because some of these alternative policy tools are rela-
tively less familiar, they may raise practical problems of imple-
mentation and of calibration of their likely economic effects.
For this reason, as I have emphasized, prevention of deflation
is preferable to cure. Nevertheless, I hope to have persuaded
you that the Federal Reserve and other economic policymakers
would be far from helpless in the face of deflation, even should
the federal funds rate hit its zero bound.
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Bernanke's full text is at:
http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm