What good is capital formation in a deflationary environment when no one wants to borrow or invest in new production?
In an environment where prices generally trended down borrowing would be focused to a greater degree on investment than consumption. There will be investment in new production so long as there remains a competitive marketplace. Those who refuse to invest in production will find themselves displaced by more productive competitors able to offer consumers lower prices. Furthermore an inflationary environment 'rewards' the spendthrift by reducing the cost of his consumption at the expense of the saver.
As evidenced by the drag of debt on our economy today borrowing for consumption is far out of whack with debt accrued for capital investment.