What's so bad about deflation due to lost BTC?
It is bad. BTC is supposed to be an ideal currency, which is guarded against both inflation and deflation. We neither want inflation nor deflation. Both will do harm to the financial viability of the BTC.
It should be less of a problem as time goes on and people get more and more careful with their BTCs.
I guess over the long run at some point as time approaches infinity it would have to by defn kill he system..
To counter this problem, I propose a very simple solution. Once it is confirmed that over 10.00% of the BTCs are "lost", then the earliest 2% should be purged and put available to mine. That means that 420,000 BTCs will be available to be mined. This cycle can be repeated, to maintain the total number of available BTCs stable.