As a reminder, the choice between inflation and deflation in a fiat currency system that is not otherwise externally constrained is a policy decision.
In a democratic republic that is also a net debtor with a trade balance problem, the most likely outcome from a financial credit contraction is stagflation.
However, this does not mean that deflation is not possible. I want to be completely clear on this point. A program of artificial austerity, in which painful cuts are visited upon the bulk of the people, further exacerbating slack aggregate demand, with the creation of national wealth flowing to the top few percent, makes a prolonged deflation, economic stagnation, and a national misery, possible.
This is characteristic of many third world countries, wherein the majority live in povery while the few monopolize the nation's wealth and income. The government would have to become a more overtly repressive authoritarian oligarchy to support this for any length of time.
