I generally don't care much about Austrian economics. Hayek's praxelology is witch doctor stuff compared to the empiricism of serious, mainstream economics. Calling me a 'Keynsian' is as crazy as intelligent design believers calling rational people 'Darwinists'. That might play well with people who already agree with you but it's still just silly political jargon. I'm a 'Keynseian' as much as believing in gravity makes me a 'Newtonian', LOL.
If you're addressing me then I assumed you were just analyzing Krugman's arguments and not necessarily a believer in his overall message. If you do agree with Krugman that probably means that we disagree, but I think its an interesting discussion.
Krugman is a well-known disciple of the keynesian school, so he pretty much thinks more spending and more activity is good, regardless of what the money is being spent on(ie his "aliens" comments, or the broken window fallacy
http://www.youtube.com/watch?v=gG3AKoL0vEs ). They've been able to become 'mainstream' largely because their conclusions help support the centralization of power into the hands of government. Nixon's "we are all Keynesians now" was a pretty horrible moment in history, IMO.
As far as frivolous spending, I'm mainly referring to the extra short-term spending that occurs as a result of the incentives of a currency undergoing inflation. I'm sure there will be plenty of people who buy bobble heads with bitcoins but my point is that an inflationary currency encourages people to spend on stuff that they wouldn't normally want or desire, leading to economic "activity" that isn't really beneficial. If people spent less time and money exchanging non-durable consumer goods then they would have more time and money to save and invest in capital like computers and microwaves or researching cures for cancer. It also allows people to better invest in other people's businesses and new ideas with loans from savings.
Whether the currency is inflationary or deflationary the capital available in the economy to create things isn't destroyed, its just deployed differently.
I googled and found these charts that show the rate of savings in the US started to drop pretty much coinciding with Nixon's closing the gold window in 1971 and the dollar being able to be printed pretty much at will:
http://ablog.typepad.com/keytrendsinglobalisation/2011/01/new-deterioration-in-the-us-savings-rate.htmlAnother thought, since bitcoin is opensource, would be to create an exact replica of bitcoin but make the total number of bitcoins infinite. This would be like Milton Freidman's money-printing machine. If people preferred a constantly inflating currency they could put their money into that. Its hard to see that gaining acceptance though.