From the economist who wrote half the textbooks we use in the economics department at my university:
http://krugman.blogs.nytimes.com/2011/09/07/golden-cyberfetters/Basically, he says that bitcoin is not really being used as a medium of exchange because it's deflationary. He has a point. If you aren't using it to buy goods and services then you are using it as a way to save your money, speculating on it. Constant deflation stops people from using it as a medium of exchange.
Its hard to argue against this. A purely deflationary currency provides no incentive for investment or economic activity; it only causes rich people to get richer just from being rich and sit on their money. Its a great system if you have money, but economically its.. not very smart to put it mildly.
I think the solution to this problem is - or could well be
ripple; or something like ripple. It allows the issuing of credit money at a rate that keeps pace with economic growth (or shrinks if the overall economy shrinks). Bitcoin could act as monetary base like gold did for fiat. Although one could question if in the longer run, if such user issued credit money becomes mainstream; if there really is a need for the monetary base in the first place.