Deflation causes the production of goods and services to become more expensive in addition to slowing down the velocity of money. Hence, businesses actually go bankrupt (as in liquidated, restructuring becomes far more risky), productive capacity sits idle, unemployment rises, consumption slumps further, remaining businesses become even more distressed, all of which leads to a complete collapse in confidence in the marketplace. In turn, individuals and businesses are encouraged to hoard money, which only leads to further slowdowns in the velocity of circulation, making money even more scarce, etc.

In such an environment, businesses undergo brutal competition for a shrinking pool of money. Simply servicing current debts and operating expenses becomes difficult. Taking out new loans and/or investing capital into such businesses is nothing short of insanity. Even if a business could raise prices the inability of consumers to pay could easily result in a net loss.

The economy is built on the velocity of money. There's a reason why Bush called on Americans to spend money in the aftermath of 9/11, the system really can't cope with a significant slowdown in spending, even if only for a few days.

Scarcity because nobody is working. It's not a contradiction. Inflation encourages economic activity - work. Deflation discourages it.