This seems like a great idea but I also don't understand how it will scale? I'm assuming the goal of bitcoin is to be at least as big as paypal right?

I see 3 scaling issues:
1) Having every node need to know about all transactions that happened ever.
2) Keeping the network connected
3) Amount of coins scaling with increased economic activity.


1) This seems like the biggest issue. Is the hope is that bandwidth and storage will keep pace with the number of transactions? Like the OP said paypal has millions of transactions a day. This will totally clog a lot of users bandwidth if they all have to be notified of each transaction.
Is the plan to eventually have the chain drop off old blocks? or is there a way to split the chain into parts so only part of the network has to keep track of certain span of coins.

2) What happens when there are a few million concurrent users? everyone connects to IRC still? (Granted this is fixable as the network grows since it seems outside of the whole block chain system)

3) You have this clever method of slowly introducing coins by time but time isn't really the important thing. Shouldn't the amount of coins in circulation be proportional to the amount of users?  If you want to avoid inflation & deflation the number of coins shouldn't the number of coins be proportional to the number of users or number of transactions or some other metric that is closer to the size of the economy?
(Also I was able to figure out how/why the 21 million number was chosen?)

1 & 2 could be solved by using a distributed hash table:
You should really look at http://en.wikipedia.org/wiki/Kademlia
I haven't looked lately to see if someone has come up with a better distributed storage system but it was by far the best solution a few years ago. (and I've implemented it before if you have questions)