One of the most significant, perhaps, the most significant, observation Prof Rogoff makes is:
"Northern taxpayers will be forced to inject massive amounts of capital into banks, even if the authorities impose significant losses on banks’ large and wholesale creditors, as well they should. These hundreds of billions of euros are already lost, and the game of pretending otherwise cannot continue indefinitely."
When you foolishly lend money to people with a track record for irresponsibility, when the inevitable occurs, it's silly to pretend you can still collect the debt.
You write: "...the effect of even mild deflation on real debt, year after year, can be significant." Just what effect do you think "even mild" inflation can do to a private person's savings? Nowadays, to save and invest for a home, college, or retirement entails a running battle with the government to prevent devaluation of one's funds through inflation. Even 2% inflation over the time it takes to amass money needed for life's major expenses is a major difficulty to surmount. Of course, governments like to pay off their debts through inflation, but that's an insidious tax that most people don't understand.
It is strange to me that liberals continue to sling the epithet "trickle down economics" to criticize market economics. In a society which funds social security, medicare, medicaid, etc., and now, Obamacare, to the extent we have virtually bankrupted ourselves, it seems more accurate to describe our system as "deluge down." One example: corporate earnings are now taxed at about 38%, then they slap a dividend tax on top of that (which Obama wants to raise). Those earnings are taxed at an effective rate of over 50%. We need to abolish capital gains, corporate preferences, and set the income tax rate at a level to extract the most revenue and stop trying for Alice in Wonderland "fairness" and "equality" just for the sake of those politically expedient misdirected claims.
Prof Shiller's position rests on this premise: "That way, the debt/GDP ratio declines because the denominator (economic output) increases, not because the numerator (the total the government has borrowed) declines." Where is the evidence that this is the case?