LTCM probably wouldn’t have collapsed if we didn’t have deflation during the mid 90’s, as the price of gold fell to a low of $253 per ounce in 1999 and oil was around $10 a barrel. There were a lot of bankruptcies as deflation is very hard on borrowers (for example, Russia defaulted on its bonds, Asian debt crisis, etc).
If we had some kind of deflation, we have started recovering by now. without unnecessary leveraged credit or huge debt or bailouts.
It had beaten the principle of free market: those who take unnecessary risks go down.
It distorted the risk perception and resultant calculation.
Everytime there is a hint of economy having serious downturn, we did the same thing and make the eventual correction more painful and dangerous.