(& that action contributes to decreasing overall money supply which propagates a deflationary spiral.)
And that is where I believe you are wrong. In bitcoin land, paying back a loan does not reduce the supply of money, so there is no deflationary spiral. In bitcoin land, paying back a loan simply means that those bitcoins are once again available to be loaned out.
Just plain old deflation, which is good for savers and bad for debtors (the exact opposite of inflation, which is good for debtors and bad for savers).