Here is what a full deflationist is really saying:

"Despite the fact that the Federal Reserve System is legally authorized to monetize any asset simply by creating digital money to buy the asset, debt will soon -- next year, probably -- be so large that millions of debtors will not be able to repay their interest on time.  They will also not accept roll-overloans at zero interest. 
Then, when they default, the Federal Reserve System will not be able to create enough digital money to buy up every dime's worth of this newly perceived bad debt.  

"The worst debtor on earth is the United States government. This government will someday simply refuse to sell any more debt to the Federal Reserve System.  All creditors who hold U.S. government debt will then refuse to sell this now-worthless debt to the FED, even though the FED offers them cash on the barrelhead for their now-worthless debt certificates."

(Gary North, Jan 2006)

Note that in my opinion this does not apply to the relative ups & downs of inflation or "stagflation"



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Here is the Deflation Case once again:

   1. Rising productivity and rampant credit expansion led to massive overcapacity.
   2. Global wage arbitrage is putting downward pressure on wages and benefits.
   3. An enormous bubble in credit lending developed causing malinvestments and speculation.
   4. Speculative credit lending fueled bubble prices in houses and other assets including the stock market
   5. At some point housing prices will fall as the pool of stupid buyers exhausts itself. The housing sector will stall
   6. A stalled housing sector will cause rising unemployment and lower demand for goods and services, appliances, eating out, etc, etc, etc.
   7. Bankruptcies will rise.
   8. Banks will not be willing to extend further credit on assets declining in value, especially to those out of work, or nearly underwater on their homes. In fact, appraisals get tighter at long last.
   9. Credit lending plunges. We have already seen the second consecutive month of declining consumer credit. This is the first time since 1992. There is every reason to believe a reversal is underway. If not now then soon.
  10. Bankruptcies and falling asset prices and people walking away from mortgage loans is a destruction of credit.
  11. If credit counted as inflation on the way up, a destruction in credit MUST be counted as deflationary on the way down.
  12. The destruction in credit, rising bankruptcies, an unwillingness of banks to lend, and a rising propensity for people to save will be greater than any monetary printing by the FED to stop it. That is what happened in Japan and that is what will happen here.

Ludwig von Mises: "Depression is the aftermath of credit expansion."

from Mish 1/17/2006 http://globaleconomicanalysis.blogspot.com/