@michael This should help you understand what deflation is and is not.
http://globaleconomicanalysis.blogspot.com/2008/01/minyan-mailbag-trends-in-inflation-and.html
According to Austrian economic theory inflation is a net expansion of money and credit. Deflation is the opposite, a net contraction of money and credit. If one accepts those terms, then it is impossible to have inflation and deflation at the same time, in aggregate.
If one chooses to separate the components, then yes, we can have inflation in money supply and deflation in credit. In fact those are the exact conditions I expect to happen. That is also an extremely good environment for gold.
There is no way consumer debt loads can be paid back given falling asset prices, and rising unemployment. Increasing foreclosures and rising defaults on credit cards are proof. Debt that cannot be paid back will be defaulted on. That is deflationary.
It is important to note that credit dwarfs money supply. In deflation, credit will contract at a far greater rate than the Fed prints. This happened in Japan and this also happened in the great depression. I expect it to happen again.
Peter Schiff wrote me to make a very important point. “Remember,” he wrote, “I too forecast a massive deflation, with both asset and consumer prices falling in terms of gold. However, these will clearly not be the case in terms of U.S. paper dollars. While asset prices may indeed fall, consumer goods prices will rise.”
Mish, who is one of the best writers in the blogosphere, has always been careful to specify how he defines deflation. He calls it a contraction of money supply and credit. He does NOT define deflation as a fall in prices (for example, he believes oil prices may go up because of Peak Oil).
http://www.marketoracle.co.uk/Article4172.html