While your fundamental argument makes some sense, I would say that what you describe is an issue with severe deflation only. As demonstrated by the Japanese experience, the system can survive for a long while with moderate deflation/disinflation. The problem with moderate deflation is not one of "collapse", but rather that of a slow and gradual withering.
Suppose we have a negative inflation .. i.e deflation of 5 % The banks cannot lend at a negative interest rate .. i.e they cannot lend $100 today get get $95 tommorrow .. no bank will do that ... Deflation will make asset prices go down but since banks won;t be financing them ... not many people can buy them ... pushing asset prices even down further .. Similarly industries won;t get access to capital .. therby lowering investment demand and thus employment .. We can live with short term deflation (which can bring down asset prices to a saner level) .. but not a long one ..(as in case of Japan)
I have a fundamental question about deflation. Wikipedia definition of deflation is the decrease in the general price level of goods and services. However, if you consider the case of Greece where deflationary policy is in place by the IMF-EU, we observe a strong inflation instead of deflation. Why IMF still defines his policy in Greece as deflationnary? Could they rather define deflation in terms of credit deflation into a falling bond price environment?