IMHO, the Keynesians pulled a fast one on us when they invented the term "velocity of money." To the average person, VOM means the rate at which economic transactions are taking place, and that's the official definition too. In reality however, that doesn't make any sense. Economic transactions themselves do not create new money; in fact, due to the existence of taxation on virtually every transaction (income tax), total money supply in the economy would shrink if VOM due to economic transaction pick up.
What really happens in the Keynesian mind is that participants in the economy going on margin based on perceived increase in business volume, borrowing new money into existence! They are really talking about the velocity of money creation, not velocity of money per se.
Debt destruction itself is not a real problem for the economy; it's part of the cleansing process. The malinvestments that allowed the debt to be created in the first place was the problem. Economic growth can take place even under widespread deflation . . . most industries would simply slash prices. The computer and telecom industries have witnessed that in the last quarter century, and they have been the fastest growing industries. Same thing happened a century previously with industrialization. What debt destruction does do is removing the "tax" imposed by banks. Perpetual inflation is good for the banks. The idea that banks do not inflation because they'd be paid back with money worth less than the money they lent out is preposterous: the lent out money is created out of thin air to begin with, so nothing can be cheaper! The bank effectively gets to collect a tax from the borrower for the duration of the debt as a price for default risk; per petual inflation removes the default risk.
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