I think this statement should read "Deflation is harmful ONLY when an economy is awash with debt. "
Inflation is the real enemy. Inflation causes savers to stop saving. That means no capital for capitalism to use. The best recent example is afghanistan where a large sack of money is needed to buy a loaf of bread and where they recently changed the money lopping off a number of zeros.
Good point. There has been an escalating credit bubble for over 70 years since the last series of wholesale defaults. As von Mises pointed out, there are only two "solutions": try to keep the bubble going (resulting, ultimately, in a collapse of the entire system) or deflation. In either case, as you correctly point out, the initial inflation is the disease. Deflation might be (probably is) the least painful cure.
The creation of capital in this country today is as easy as using the Feds magic checkbook, if people borrow. The Fed will take inflation anyday, at least they can control it, they cannot control deflation.