AH! I LOVE YOU!
Seriously I was about to completely lose it with Premiere and seriously considered FCP. My situation is still quite stupid but you have hit the nail mostly on the head.
first I tried setting up a sequence as (progressive). The result was a much clearer image during little motion, but low and behold when the character moved warbly ghosting would appear.
Then I tried going back to the normal 640×480 sequence and changed the field to “always de-interlace” on the clip settings which sadly had no effect.
Finally I went back to my progressive sequence, changed the clip to “always de-interlace” and voila! Finally the full crispness the video was intended to be!
Strange notes: My camera (admittedly lower end) the JVC HD7, supposedly creates files that are 1920×1080 square, interlaced. When I did some research however, I found out that the camera apparently first captures 1080p then somehow converts it to interlaced https://en.wikipedia.org/wiki/JVC_GZ-HD7. This seems ridiculous to me.
I am also still a bit confused why even in the timeline and timeline monitor my raw files 1920x1080i square scaled down into a 640x480i square timeline look low quality, but the same file looks fine in a 1920x1080i timeline OR when scaling down looks fine in a 640×480 square but only if DE-interlaced in a progressive timeline.
This is some heady video science that I am trying to wrap my head around but only getting halfway.
Whether I totally get it or not, I have found the solution and owe it all to you Tim Kolb.
Thank you, and thanks CCF