There are really two kinds of deflation. Servicing a debt and paying off a debt. Paying off a debt early causes LESS money to be sucked out of the economy in the form of interest, and increases the intrinsic value of one's financial assets. This increases the value of the dollar both by decreasing its supply, and increasing its perceived value internationally. In this scenario, bank loans are continuing to be made because the financial health of the nation, in general, is good.
However, deflation can also be caused servicing loans when no further loans are being made. Interest is sucking cash out of the economy, and loans are not being made to replace it. Because much of our productivity is based upon the ability to acquire easy credit, such deflation causes a halt to productivity, which leads to a further inability to service existing loans. Default follows, with the flotsam of toxic assets in its wake. Very bad news.
In a central bank system, both forms of deflation inevitably lead to inflation. The hope of central bankers is to control the currency supply such that just enough cash is added in the form of loans to keep the system solvent. However, central planning of an economy never works, and thus we come to the latter form of inflation, which is what we were experiencing just before the bundle of bailouts from the lest several years.
In the latter form of deflation, not only is the dollar perceived as worthless, but it is further devalued by the reactionary inflation which is invariably used to "solve" the crisis. So as you can see, inevitably it is inflation that causes the cost of overseas goods and services to increase.
You have to consider why exactly it is that the cost of goods and services overseas would normally be going up:
China is holding has bought vast sums of US Dollars in order to keep their currency low in relation to the dollar. By buying lots of dollars, China exchanges dollars for Yuan. Yuans flood the market, but China locks up the dollars in the bank. Yuans are inflated. The Dollar is deflated. The Dollars still exist - but they are not in circulation. If China were to liquidate their reserves of US Dollars, this would result in massive inflation. But China can only keep this up for so long. If we flood the market with dollars faster than China can buy them relative to its own currency, this strategy will fail, and eventually China will be forced to liquidate its dollar reserves. This will have the effect of driving the price of the Yuan up, and the Dollar further down.
The last part looks a little scary: "If we flood the market with dollars faster than China can buy them relative to its own currency, this strategy will fail, and eventually China will be forced to liquidate its dollar reserves. This will have the effect of driving the price of the Yuan up, and the Dollar further down."
The problem I see with this is that when the U.S. pumps more money into circulation by buying up U.S. treasury bonds, etc., it further devalues the dollar. The Chinese (and Russia, India, etc.) know this well, and are perfectly happy with this. They'll continue to watch us devalue the dollar. Later, if we try to pull anything, they'll use the money they've amassed to buy up an overwhelming military force. But obviously, they'd rather own us than fight us. Not that they are set on world domination, but when the idiot on the block keeps lowering the cost of his mansion, and you'd like to have that mansion, you'd be stupid not to let him lower the cost until you can buy it for 20% off (or more).
However, deflation can also be caused servicing loans when no further loans are being made. Interest is sucking cash out of the economy, and loans are not being made to replace it. Because much of our productivity is based upon the ability to acquire easy credit, such deflation causes a halt to productivity, which leads to a further inability to service existing loans. Default follows, with the flotsam of toxic assets in its wake. Very bad news.
In a central bank system, both forms of deflation inevitably lead to inflation. The hope of central bankers is to control the currency supply such that just enough cash is added in the form of loans to keep the system solvent. However, central planning of an economy never works, and thus we come to the latter form of inflation, which is what we were experiencing just before the bundle of bailouts from the lest several years.
In the latter form of deflation, not only is the dollar perceived as worthless, but it is further devalued by the reactionary inflation which is invariably used to "solve" the crisis. So as you can see, inevitably it is inflation that causes the cost of overseas goods and services to increase.
You have to consider why exactly it is that the cost of goods and services overseas would normally be going up:
China is holding has bought vast sums of US Dollars in order to keep their currency low in relation to the dollar. By buying lots of dollars, China exchanges dollars for Yuan. Yuans flood the market, but China locks up the dollars in the bank. Yuans are inflated. The Dollar is deflated. The Dollars still exist - but they are not in circulation. If China were to liquidate their reserves of US Dollars, this would result in massive inflation. But China can only keep this up for so long. If we flood the market with dollars faster than China can buy them relative to its own currency, this strategy will fail, and eventually China will be forced to liquidate its dollar reserves. This will have the effect of driving the price of the Yuan up, and the Dollar further down.