Insightful stuff you posted there, cruisie. My compliments. I don't think we're heading towards deflation yet. For all I know, the Fed wants to do anything but create another depression like the US had in the 30s. And most people agree that deflation was one of the big issues around that time.

Inflation is the obvious opposite and probably the only way to get rid of the enormous debts US citizens have, and let's not forget US Government debt! At present, inflation still stands at 16/17% y.o.y. and that's a long way from deflation.

As to how gold would do in times of deflation... I really haven't got a clue since I've never been there. We may assume that saving money would be much better than consuming, so there will hardly be any consumption left. Debts would grow and grow and banks would indeed be in trouble with borrowers not being able to repay their debts. Gold would then probably still be a good option, though logically all commodities should lose their value.