[John Kilduff]

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Yes, being the debtor is worse than being the creditor. However, a proper lending economy requires both of those statuses to be present in order to work

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Agreed, but you usually would prefer to be in a position to be the lender. Wouldn't the USA be better off as a net lender nation than as a net debtor nation, internationally speaking?

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Think of it this way: inflation is simply another factor to be subtracted from the future value of money, and is therefore factored into the interest rate of any given loan. If a proper interest rate would be 5%, a 2% inflation rate makes that rate 7%. That's basically all that (mild) inflation does.

Now let's assume we have a deflationary economy and *add* a deflation % to the future value of money, thereby making it worth more than the present value....

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In which case a 5% interest rate adjusted for 2% deflation would be 3%?

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...Theoretically, because I'm now guaranteed some return on a loan by simply putting it under my mattress, there is almost no risk to the lender and interest rates should be zero.

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Why zero? The use of money now can be turned to profit in a good business at a rate higher than interest paid.

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However, a zero interest rate means there is no incentive for the lender to loan money at all, while an interest rate substantially above zero is a usurious rate that only a sucker would take. The actual percentage of deflation doesn't matter.

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Not sure how or why we get from 3% (which is 5% - 2%) to 0%.
Why wouldn't there some middle ground for interest rates if the rate of deflation is low?

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(Now, take this one step further. In the real world, most loans are given out for two reasons: for consumer spending and for business growth. If consumers are discouraged from spending, what happens to businesses? If businesses are already in a crunch from the former, and now cannot take out new loans at reasonable rates because it's far less risky to put the money in a mattress, what happens to them?)

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I'm finding it hard to see why there couldn't be some area in between or room to work within as long as the rate of deflation is very low.