The problem with the classical deflationary argument is that it only works if the currency can hold value while the economy is doing poorly. A currency based on gold, for example, can do this.
The value of a currency based upon imagination and wishfull thinking can fall even while true deflation via debt destruction is occuring.
In Argentina, for example, they recently had a banking crisis that caused very much money to evaporate. This is deflationary in the monetary sense. However, as faith was lost in the currency(both nationally and internationally) the value of the currency dropped as well. Meaning that prices continued to rise even while deflation was occuring faster the ability to create new money.
The debt crisis in the U.S. is deflationary in the monetary sense. But we are also seeing both true inflation in other areas and a lack of confidence in the dollar.
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