The macro resilience blog has a post that uses a term "snap back" a term that I had never seen used in this context but it seems like a great way to describe the problem.
"The problem in a credit economy is not so much excess savings but as Borio and Disyatat put it, excess elasticity. "
...
"If our financial system is a rubber band, the long arc of monetary system evolution from a metallic standard to a credit economy via the Bretton Woods regime has been largely a process of increasing the elasticity of this rubber band (excepting the period of financial repression post-WW2 when the trend reversed temporarily). Snap-backs are inevitable – the question is simply whether the snap-backs are “normal” or catastrophic."
This "snap back" is the problem that I think competitive currency issuing can solve. In a system with bank's currency backed only in bank assets in the face of deflation banks would have an incentive to issue more currency to by up assets. This would slow the appreciation of currency (deflation) and slow the fall in asset prices. Further more if currency is not Government issued it might not out compete stocks and other investment so badly when people are scared.
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