That would be my intuition too. But if you go down almost any "this crisis won't cause inflation because..." rabbit hole on hacker news, you should see multiple unopposed claims that defaults lead to deflation through the destruction of money.
I'm pretty ignorant in this field, and usually I've been a day or so behind the posts (missing the window to press for more information), but I feel like there's definitely some contention there.
Suppose I'm a bank, and I lend you $10 to buy apple tree seedlings. You spend all $10 on seedlings as promised.
The person who sold you the seedlings has $10. You have the seedlings. I have an expectation of getting $10 in the future, presumably from your sales of apples.
Because most people repay their loans, I'm confident I'll get the $10 back, and being a bank, my business is lending money. I might treat the $10 loan as $7 on my balance sheet when I decide how much money is safe to lend out.
Then the price of apples crashes. You come to me and say, 'look, there's no way I'll make $10 selling apples in the time I promised to repay you. Best I can do is deliver you the seedlings or sell them to my neighbor for $3 and give you that'. I grumble a little, but take your deal.
The person you bought the seedlings from still has $10.
Your neighbor now has the seedlings and $3 less.
I now have 3 real dollars instead of 7 hypothetical dollars. In other words, 4 hypothetical dollars disappeared. When I decide how much to lend out, I'll be basing that on $3 I know I have, instead of the $10 I thought I'd probably get back. I don't lend as much money to aspiring orchardists (orchardeers?), and the price of apples rises.
Edit: This fragility is probably a major factor why some people are so against fractional reserve banking (my counting hypothetical dollars as having value) but without that hack, there's no saying I could have lent you the original $10, so it's a bit of a double-edged sword.
So in this case the business did not create as much wealth as intended (it produced apples which turned out not to be needed as much they had originally planned).
The default is a side effect of that outcome, not its cause.
I can see that the bank ended up with $4 less than it planned to, but I don't see that as money being destroyed. It happened because the original estimate of hypothetical dollars was wrong. (Also if the hypothetical dollars are "money" then you're double counting it: creating $10 in circulation has required creating $17 overall which strikes me as poor notation to say the least). (Also if all had gone according to plan, the extra $4 would have come from the pockets of people buying apples. That $4 is still in circulation, either in the same pockets or it got spent elsewhere).
Suppose I buy a painting. I believe it to be an original Van Gogh so I pay $10 million for it. I then find out it is fake, and worthless. Was $10 million (of money) destroyed? Of course not, I just mis-valued an asset. Suppose it then turns out to be real after all. Owing to the fascinating history of this painting it is now valued at $20 million. Was $10 million of money created (relative to the moment when I originally thought it was a Van Gogh)? No. Was $10 million of wealth created? Yes as the world now has one more thing worth $10 million in it.
Money != wealth, even in the materialist sense where wealth consists purely of goods and services. Money is a metric we use to keep track of wealth, and in general it's considered helpful if that relationship holds, so if we're trying to maintain that relation rigorously the central bank should print another $10 million (or create it by making loans) to reflect our knowledge and appreciation of the Van Gogh - if it doesn't then the existing fixed quantity of money in the system will now be representing a greater quantity of wealth, causing deflation.
As I said in my other post I am not an economist by training. If the economists want to call this thing that got created/destroyed here "money" then I guess I should let them, but I would like to hear a good reason why it makes sense to do so, and I haven't heard one. Absent of a good reason I might as well call it haddock. Or, considering the OP was asking which things that could be explained better, we could acknowledge what any good programmer knows: part of a good explanation is choosing the right names for things.
As I think of it, credit (what got destroyed) and currency (what was used to create the credit) are interchangeable - $10 of credit buys as many seedlings as $10 of currency, hence we think of them as one 'thing' - I might call 'money' the category including both, though I'm no expert in economics either and these might be nothing like the official jargon. But what does seem reliable is that destroying $4 of credit has the same effect on the price of apples as would destroying $4 of currency, though the latter is a more rare event.
The difference is that it's the liquidation process from defaults that causes deflation, not the defaulting itself. Without the liquidation process, if you assume defaulting had no consequences, that's indeed inflation - as everyone is allowed to create money without consequence.
Thanks. I think this point has made it a lot clearer.
So sure, the loaned money might still be in the system in some naive sense, but value has been destroyed in the asset price? Suddenly a lot less money buys a lot more asset and that's where we find the deflation.
If I borrow 1M for an asset in good times and can't pay it back, the creditor gets the asset and probably gets a good portion of that 1M back. If that same scenario plays out in bad times and my whole street defaults on the same asset at once, there's a resulting fire sale and far more value is destroyed (including being wiped off neighbouring, non-creditor-owned assets of the same type) than money added by leaving the loan sloshing around somewhere else in the economy.
