Inflation or Deflation?

Mish at Global Economic Analysis is still convinced that we are headed for deflation. I am not so sure. Here is why:

What will be the effect of all the deficits that the local, state, and Federal governments will be running. The fact that we are entering this recession/depression from a period of high levels of deficits, don't give me much confidence in deflationary theory.

All the Keynesians and Monetarists infesting the government wouldn't want government to shrink, people wouldn't want it either. What will that do to the dollar?

What if the Chinese and Japanese governments use their dollar reserves to stimulate their economies? What impact will it have on the dollar?

I also believe, that it's not just subprime borrower, but our whole country is broke. How could that be good for us as a borrower? How can that be good for the dollar? Do you think, given the conditions, it will be easy for the deficit spending government to knock on the door of People's Bank of China, Bank of Japan or Saudi Arabian Monetary Agency, and get approved for credit as we frequently as we will need them?

The fact that no player in the market wants to buy the subprime loans is telling. It is worthless. Who would want to buy the currency ( increasingly backed by failed mortgages ) of a country that is essentially bankrupt?

There is no doubt that the credit turmoil in America will have it's ripple effects across the rest of the world, but does it change the fact that we still are the subprime borrower ?

Addendum 10/04/08 12:04AM pacific:

Another way to look at USD as a CMO backed by the worst mortgages in America. A mortgage backed currency called Assignat was once tried in france. It led to hyperinflation and a collapse.