morpheus,
While pondering this topic this morning I suddenly realized there is a fatal flaw in your plan as stated. I'm very sad to have to point this out, because I really want something like this to work because it is so beautifully simple.
Your plan to destroy coins will not work as stated. You are right that destroying coins will give people incentive to not transfer them between wallets, but they will simply sell whole wallets loaded with coins instead. Once some people start doing this, anybody transferring the normal way will be at a disadvantage, and everyone will have to start doing it, then *poof* you completely lose all control over reducing the coin supply.
Personally, I have to return to pondering the hideously complex ideas in my proposal for the second bitcoin whitepaper for now, but I'm hoping you have a good answer for this because I liked your idea better.
You could use demurrage instead of fees to destroy the currency. With demurrage the velocity of circulation would also be more constant and higher, thus the changes in the monetary base
affecting more to the value of the currency.
I still see the problem of how do you get to the target value in the first place. The system can't control the value of a currency only by controlling its monetary base, and you have limits on how fast you can destroy and create. At the beginning you need to increase its value and also create much more than it is destroyed. I guess the value targeting system should be "switched off" until the currency reaches certain value.
Although I'm very curious about the feasibility of a decentralized stable currency, I'm not sure it would be desirable "for the economy".
The hard technical problem of a decentralized price index is still there. It could be very useful to solve it even without the stable currency.