Gary, you asked a lot of questions, and I am not qualified to answer them all. Given the sharpness of your “common sense” I suspect you already know what I do. But I will share two of my thoughts related to your questions:
1. People who want more money tend to look for it where it’s already piled up. In the split between borrowers and savers, that means there’s always political pressure from borrowers to reduce their debts to savers. Inflation is a very handy way to accomplish this transfer. It’s a silent borrowers’ tax on savers. Since there are many more voting borrowers than savers, net inflation is more common than deflation. Even when people do save, it tends to be in things like pension funds where they can’t see clearly how they lose from inflation. Their debts are very clear to them – home loans and credit card debt and car loans.
2. Deflation increases the value of cash. So you’d be inclined to hold onto it if deflation were significant. If a lot of people do that, spending could plummet lower than even extremely conservative people (like me) want. So sensible managers of our economy tend to err on the side of inflation just to avoid deflation.
I am not ready to say that a depression is coming. The world’s economy is still expanding briskly, and a recession in the US is likely to be pulled up eventually by growth in other countries. Even when the world wasn’t doing as well as it’s doing now, most past recessions did end before they became depressions.
