We finally have a winner !
Debt destruction is reducing the money supply at an accelerating pace and there is nothing the Fed can do when there is declining trust in the banks' solvency and transparency.
Paying off loans means that people will eventually have more money with which to buy things since they won't be paying the banks interest, not less.
If a large percentage of people concentrate on paying off debts instead of purchasing new items, it does make our economy shrink slightly for a little while, but makes it more stable in the long run because there is less risk of people defaulting on their loans.
A lot of people borrowing at once (such as the housing boom) helps our economy grow quickly, but makes it more unstable because the levels of debt make more defaults more likely.
The housing crash has slowed our economy. It may even trigger a slight recession. By itself, it won't trigger a depression. However, Congress might push it over the edge with cumbersome entitlement programs and foolish things like global warming cap and trade schemes.
Nicely said. All of it.