OK, now we have plain old aggegate demand collapse

Yes, that is what we have, everyone wants to hoard.  Karl Smith takes off on this point:

You could believe that deficit spending today causes people to save more in anticipation of higher taxes tomorrow but it takes some pretty heroic assumptions to get all the way to the idea that deficits can’t possibly spur demand.

He implies that deficit spending must work. What would happen if the Tea Party drank the Koolaid and tried this medicine. Oil would jump above $120, and we would go straight to a contraction. Remember, we tried this before [late 2009] and ran oil up to $95 [early 2010]  from its low of $75. Go take a look.  I looked, OPEC looked, the consumer looked, the producer looked,  the result is precalculaed in our heads.  We got the Tea Party instead of recovery when we tried it.

The problem that Hayek and Keynes had was the assumption that government is incalculable or controllable by elites. It is neither, we agents have bound functions of what happens  from near and far history of government spending.  We agents do the computation.