As somebody who has studied economics, can I just state that stable low inflation is the BEST course for any currency (whether virtual or fiat)?
Why else do the largest most established central banks try to achieve inflation rates of around 2%?
A: Because they get the money first, while it is literally more valuable than by the time it reaches us plebes.
B: Because they're not consumers and are largely unaffected by inflation, except through A, which benefits them.
The thing I question about a deflationary economy is... do people take pay cuts every year in such an economy? It is customary in many businesses to give "cost of living" raises on a regular basis... but in a deflationary economy, the business will receive less and less money per unit sold, so it would have to give its employees less and less money to avoid going bankrupt. It matters not that the money on a per-unit basis is more valuable -- if it receives less units, and has to give less of those units to its employees. So... in BTC-world, you take yearly pay-cuts. I'm going to agree with another poster here -- the best currency is one that neither inflates nor deflates.
Inflation encourages investment. If on average you expect your holdings to be worth less in the future you will logically invest it to hedge against value loss. Investment leads to economic stimulation in the real economy. That is a positive cycle.
"Encouraging investment" as you use it is trying to impose one's will over others. Investment involves risk. Risk-takers will invest regardless in order to make more money. "Encourage investment" in this context is a euphemism for "steal value from savers so that saving becomes a net loss activity and investment becomes the lower-risk activity." Note that you didn't decrease the risks of investment, you just increased the risk of saving. The whole scheme is based on negative feedback. A better system of "encouraging investment" would be to either lower the risk or increase the return. A currency that doesn't inflate or deflate does just that. It lowers the risk, because the company you're investing in won't be subject to the increasing costs of production, thus will have a better chance of surviving. It increases return both due to the factor I just mentioned, and the fact that the money you receive from such an investment isn't devalued. If you make 2% on an investment when there is no inflation, you actually made 2%. If there was 2% inflation... you didn't make jack. Good thing some a**hole decided for you that you should risk your hard-earned money just so you could break even...