It seems that there is more to Shinzo Abe than meets the eye. Deflation in Japan in the fourth quarter of 2012 was as high (low?) as -4% (GDP deflator) which must be rated as a massive failure of central bank policy: http://rwer.wordpress.com/2013/02/17/graph-of-the-day-a-deflation-shock-in-japan/
A little about the 'solution' you propose. An market is about demand and supply - and you do not talk about demand at all. Weird. In recent times, The first thing demand was, indeed, fuelled by increasing private debt levels. We both know that this road has been closed - at least when it comes to mortgage debts. One reason debt levels (compared with GDP) increased is the increase of mortgage debt which did not lead to new nominal production and income (in the sense of the national accounts) but to higher house prices. It lead to inflation in the non-GDP economy, instead of the GDP economy. But it has to be paid back using nominal GDP-income, which did not increase because of this debt - quite another situation than debts which are used to finance investments and the like. Unlike debts which fuel aggregate demand, these mortgage debts did not lead to a matching increase of income but only to a inflationary increase of perceived (housing) wealth, which becomes a problem when Ponzi financing stops and house prices decrease (as the Dutch are experiencing, at this moment). The same real houses and nominal incomes, but much higher mortgages. Don't underestimate the amount of monetary financing of the housing market, in the Netherlands alone this amounted (official statistics) to about 600 billion Euro over the last twenty years, i.e. total Dutch GDP (which did not lead to inflation or current account deficits as it was, on a net basis, squirreled away in pension funds, deposits and non-financial company savings). Look here for a graph of monetary financing of dutch mortgages (billioins): http://www.luxetveritas.nl/blog/wp-content/uploads/2013/01/Nederlandse-hypotheken.png
Also, the structure of the Eurozone leads to imbalances which can only be counteracted by a fiscal sovereign which is also a monetary sovereign - and which does not exist in the Eurozone. In 1992 Wynne Godley already made a detailed prediction of the present mess: http://www.lrb.co.uk/v14/n19/wynne-godley/maastricht-and-all-that
To underscore the depth of the Eurocrisis you might consult this graph about (the disappearance of) money in Greece: http://rwer.files.wordpress.com/2012/10/op-zijn-grieks.png
Again: this Moneygeddon is not caused by the lazyness of the Greek or something like that - but by the structural and ideological forces which were analysed by Godley, back in 1992. Read the guy.
Which leads to the last point: were does new final demand have to come from? You state that it will miraculously appear when new sectors spring into existence. But 'demand' needs money and income to pay for the products of these new sectors, there is nothing (nothing) in your analysis which suggests how this money and income comes into existence, in a situation of high indebtedness where people (at least in the Eurozone) are paying of debts and therwith destructing money (consult the ECB monetary statistics) or spend their money on stamps and other safe assets instead of production generating final demand (you might want to read chapter 17 and 19 of that famous 1936 book on this). Please, explain. Will households do the spending? The government? Non-financial companies? One of the more remarkable aspects of new classical thinking is the neglect of money - which is mirrored in your 'solution'. Please, explain what will happen, as intertemporal optimization is of course a fata morgana. What we should do is of course make mortgage debts more flexible, i.e. couple them to the value of incomes and houses using for instance negative interest rates (remember: the money lent was newly created by the banks and the borrowers together, it was not somebody else his or her money before it was lent as it did not exist before the act of borrowing/lending!) and to increase wages. This might indeed lead to the income and spending power which will allow new dynamic sectors like 'care for the elderly' to grow. Believe me: this is in countries like Germany one of THE growth sectors, at the moment. And the long run is quite short, for its customers...
The elderly plummer example is not really good. Stamp collecting is exactly the kind of thing - a flight into safe assets, remember that stamps are a kind of money - which makes the circular flow of money go of track. Money is not traded for new production - but for existing assets, which interrupts the circular flow and leads to lower expenditure on production and therewith to a lower propensity to invest. Remember that Greek households at this moment are paying down debt (which is of course the safest kind of safe micro asset - but which in our fiat money system this leads, macro, to money destruction...)
One of the problems of Inflation Targeting of the ECB is their rather limited definition of inflation, which by their definition is, short and simple, equal to changes in the 'Harmonized Index of Consumer Prices' (HICP) - as if there are no investments or asset prices! They've maintained this definition since 1998. http://rwer.wordpress.com/2011/12/16/defining-inflation-remarkable-differences-between-the-ecb-and-the-fed/
Compare this with the inflation definition of the Fed: “Inflation occurs when the prices of goods and services increase over time. Inflation cannot be measured by an increase in the cost of one product or service, or even several products or services. Rather, inflation is a general increase in the overall price level of the goods and services in the economy. Federal Reserve policymakers evaluate changes in inflation by monitoring several different price indexes. A price index measures changes in the price of a group of goods and services. The Fed considers several price indexes because different indexes track different products and services, and because indexes are calculated differently. Therefore, various indexes can send diverse signals about inflation. The Fed often emphasizes the price inflation measure for personal consumption expenditures (PCE), produced by the Department of Commerce, largely because the PCE index covers a wide range of household spending. However, the Fed closely tracks other inflation measures as well, including the consumer price indexes and producer price indexes issued by the Department of Labor. When evaluating the rate of inflation, Federal Reserve policymakers also take the following steps:
•First, because inflation numbers can vary erratically from month to month, policymakers generally consider average inflation over longer periods of time, ranging from a few months to a year or longer. •Second, policymakers routinely examine the subcategories that make up a broad price index to help determine if a rise in inflation can be attributed to price changes that are likely to be temporary or unique events. Since the Fed’s policy works with a lag, it must make policy based on its best forecast of inflation. Therefore, the Fed must try to determine if an inflation development is likely to persist or not. •Finally, policymakers examine a variety of “core” inflation measures to help identify inflation trends"
No, that's not short or simple. But not everything in life is short and simple. Even then, house prices are however still not mentioned. Or the fact that higher wages (which in a number of cases almost directly measured as a price entering the consumer price index) might sometimes be higher as productivy has increased, i.e. a quality increase in stead of a price increase. Though the consumer price index (contrary to the HICP!) is a very usefull rod to measure putchasing power of wages, it should not be abused as a rod to estimate inflation. And using the HICP to the exclusion of other metrics did contribute to the present troubles - the dogmatism of the ECB still makes its policies in incredulous.