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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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Internationally speaking, every major nation except Canada (which has reserves of every major commodity and little population) is a net debtor because the indebtedness is largely to its own citizens. But that's neither here nor there, because that has nothing to do with inflation or deflation - except in the sense that since we're debtors, deflation would make us worse off. I'm honestly not getting what you're trying to say with this.
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In which case a 5% interest rate adjusted for 2% deflation would be 3%?
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It doesn't work like that. You can add inflation to the interest rate, but you cannot subtract deflation from it. Again, the reason is because inflation is merely one factor in an equation in which the future value of money is less than the present value. When future value > present value, interest rates, which are a measure of rewarding the risky behavior of loaning out money, stop functioning, because there is now no reason to loan it out at all; you can just sit on it.
If you still don't get it, try the Wiki (
http://en.wikipedia.org/wiki/Deflation). It's a good summary.
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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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You're still ignoring the immediate real world impact on consumer spending. What are these "good businesses" in a deflationary economy with no consumers spending any money?
Check out Japan in the 90's for a good example of just this effect in action.