The inflation isn't about lessening the amount of repayment -- inflation is about forcing money into circulation. This is my very limited understanding of modern monetary theory in which the US operates.
The 'target' 2% inflation of the fed is to... encourage money to be in circulation. This is for the you and I's of the country - so you won't huddle away money in a lockbox for fear it will diminish in value enough such that you'll accept the risk of investing or put it into a low yield savings account, bonds, whatever, wherein that risk is assumed by another and can remain in circulation.
I recall a story, recently even, about a home that was found to have $50k hidden in the walls from the 40's. $50k in the 40's would have bought you the house it was in probably 5-10 times over. For most, a full retirement. Today? That wouldn't even buy an empty lot. The general area I live empty lots are typically around $200k for less than 1/4 acre.
I personally don't understand where people see deflation coming in. Looking back through history, particularly the Carter era, the only thing remotely close to deflation was Congress changing how inflation was measured so they could cut social security payments without cutting social security payments.
In a perfect world, in theory, deflation would just lead to the value of currency increasing. But more realistically what would happen is the complete collapse of our economy as a whole. Like '08, people would bail on mortgages, cars, or any other borrowed assets that could be abandoned. It would be done in such significant numbers as to cause the banks to fail... again, and again the fed would run in and bail them out with trillions, which would lead to... inflation.
The whole thing is a giant jenga tower.
I am by no means an economic expert, not even an armature, so this is all just a 'my 2 cents' kind of thing.
First, let me say this: I am not arguing with you here. This is a difficult topic with all kinds of real world implications to every pocketbook in the world. And I contend that most do not understand what they have been subjected to with fiat currency. I see deflation as a painful but needed way to get rid of the bad investments in poor companies and individuals in the economy.
Monetary inflation (not price inflation, that's a different thing) is done to increase the amount of money in circulation. But ask yourself - why is this needed? If there was no monetary inflation then the price of things would be static or decline, all other things being equal, even with fiat currency. But, the government keeps spending more to fund its desires, so they need more money. So they print it. Obviously there are congressional votes etc. in that process, but you get the idea - we don't have the money, we need the money, so print it so we can get done what we want to get done.
The reason it contributes to the lessening of the repayment liability goes directly to your very good analogy of $50K in a wall - the money of the past isn't worth as much as the money today. If the government takes out a loan (say a 20 or 30 year bond) at say 5% it has to repay that amount. But - since they don't have that money they will create MORE money to repay it - yet another series of bonds at some other rate. That's MORE money in the system, so the value of the dollar goes down and prices will go up because of the increased money supply. This is a very simple explanation at the federal level. So over time you wind up with more money in the economy that comes back to the government in the form of taxation which they will use to pay off some (not all by a long shot) of the government debt, pay gov't employees, social programs, etc). They have created more money to pay off their debts while not curtailing anything related to spending, and have only increased thier overall debt for the next generation to deal with.
This is part of the equation. The other part is the banks themselves. This can get hard to understand, but basically the banks are responsible for a large portion of the unfunded liabilities in the economy through fractional reserve banking. For every dollar that is put into a savings account a portion of it is lent out, sometimes a whole dollar. This means that $1 is turned into $2. This is what runs the economy, and in fiat terms that second dollar is created essentially out of thin air by the lending institution. Again, this is a high level explanation.
Here is the issue: our economy is almost totally reliant upon these dollars being created by the banks. When Powell and the other morons talk about inflation they are mostly concerned with price inflation (CPI). They use this as a metric for economic activity which translates into loan activity, which is correlated to consumer outlook and sentiment - people spend more when they think things are good, and banks lend (create money) when they think things are good. When they curtail lending it slows down the economy because they are not creating the money for increased economic activity through creating loans. IOW, they are slowing the debt and economic cycle. This is what we are experiencing now and will continue to experience until the banks feel confident enough to start lending again.
OK, that's the upside to money creation. Now when you pay off a loan money is destroyed because you give your bank money to pay off a loan. That means that there is $1 less in the system (remember this is all computer money these days, not actual greenbacks). That isn't money that is true savings, it is a dollar that the bank uses to reduce their outstanding loan value. If the banks aren't lending out money but have switched to mostly taking in loan payments then you have a situation where the banks are not creating money, they are only taking it in and not contributing to the overall economic activity. This causes a deflation of the money supply - a reduction of the money in the economy. If it goes on for a while it causes a dramatic shrinkage of overall money transfers in the economy (the velocity of money). This causes a decrease in tax revenues, which causes an increase in the need for MORE bonds or a decrease in the budget (which seems to never happen AND will also hurt the overall economy).
This essentially comes down to a debt trap that there is no way out of. It is greatly exacerbated by higher interest rates and lower bank lending, which is what we have now. It always hits the citizens pocketbook. Add to this monetary deflation the other issue of price inflation through supply chain shocks, etc and you have a real hollowing out of what Joe Sixpack can endure. This is where we are.
The government is trying to deflate it's debt through the creation of money and increased taxation while the consumer is also benefitting through taking out a 30 year loan in say 2001 and repaying it throughout that time while receiving higher wages that came about through wage increases (that came through money creation by the banks and increased economic activity). If it ever stops and goes down the deflation path and people get laid off, the use of monetary inflation to pay off debt goes away, but the actual dollar value remaining on any debt that exists in the economy starts to take bigger and bigger bites out of the debtor's income. People begin to default and shit goes sideways, which is what we are beginning to see now.
Deflation is occurring in the car market (no buyers) and is beginning to rear its head in the real estate market big time - commercial and residential (no buyers, no renters), and a good portion of this has to do with banks not lending the way they were two years ago, along with other outside factors. Jobs are being lost and people are not able to make ends meet. This is the trap of inflating the money supply through debt instead of finding more of a rare physical item to back the money (like precious metals). It has stimulated the world economy and raised the standard of living for many, but when it seizes up it can go from simple recessions to something much worse.
Honestly, I don't expect many here to read this as it is long even though it is a high-level summary. I will look for some videos explaining this. There are some pretty good ones out there. Again, from my standpoint deflation serves as a way to get rid of all the bad investment and makes way for a better use of capital, but it is for sure painful. And you are spot on with the Jenga tower. LCTM and the GFC of 2008-10 showed that to be very true.
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