But that's just it. The deflationary effect of lost Bitcoins is already offset by the risk involved with holding them. There's already balance.
I think I am starting to see what you are saying here. Is it something along the lines of "people know about the risk of losing Bitcoins and account for it accordingly"? Sorry, I'm probably being dense on this one...
I feel that we are aiming for the stability of subtly different things.
I am looking to make economic calculation as easy as possible. The more stable prices are (i.e. the degree to which they are likely to change over time) the more easily someone can plan for the future.
Please tell me what you think about the following scenario (you may assume no variation in the size of the underlying economy, no coin loss, no block rewards, and no divisibility limit):
I design an altcoin called Deflatacoin. This is identical to Bitcoin but where on each day, the balance of each wallet is reduced by 0.1% (0.1% of all deflatacoins are destroyed). This causes serious price deflation (about 44% per year).
Is this price deflation economically problematic? Should it be countered by an equal amount of monetary inflation? Is this currency more stable with or without the extra inflation?
I would say it is not problematic as it is a static amount each day, which is something people can account for. If the amount were variable, as in the case of lost Bitcoins, there is no way people could account for such loses. Giving them a know offsetting amount allows them to plan better, although still not perfectly.