[el_senor_duerpo]

I'm always peeved by this reference to Keynes. This is a topic that is universally recognized by almost all economists, with the exception of a few Austrians. In fact, the main proponent of this concept was a conservative economist from the University of Chicago named Irving Fischer. Because the Great Depression was a period of absolute deflation (falling prices and falling output), this was a central concern to Keynes as well. However, it was none other than Milton Friedman, a lead figure in the resurgence of neo-liberal (libertarian) thought in the mid 20th century. In fact, Milton Friedman's most famous work (the work with Anna Schwartz), was all about how the Fed caused the double-dip in the Great depression by enforcing the gold standard and contracting the money supply. See? Friedman (a libertarian) rose to fame for his claim that the Fed destroyed too much money during the Great Depression!

Edit: One quick thing I forgot. Keynesian economics is all about the idea that, if prices are "sticky" and cannot fully adjust in real time, then that leads to drops in output. The flip side of this, which is evident in the current crisis, is downward nominal wage rigidity. The fact that prices are slow to adjust partially mitigates the threats of deflation. So if anything, Keynesians have less to worry about from deflation than other factions of macroeconomists.

[zenocon]

It isn't entirely clear to me what you're trying to say. With respect to Friedman and the Great Depression, he drew the conclusion that the Fed a) failed to act as a lender of last resort (i.e. they could have adjusted the price of gold -- which they never tried), but more importantly b) the crisis would have never occurred, and the economy as a whole would have been better off if the Fed were never created in the first place [1].

[1] http://www.fee.org/the_freeman/detail/the-great-depression-a...

Anyway, this is all taking a left turn here. It has been fun, but there are probably better forums than HN for discussing macro-econ. Maybe I'll see you in one of the subreddits, and we can debate it in more depth there.