Bitcoin is similar to gold in terms of finite supply and increasing mining costs. Every argument you can make against Bitcoin economy you can make against gold economy, but gold economy still works. Actually, gold currency has been throughout the history unmatched by any paper money in stability.

It's an old keynesian argument that deflation is bad because it leads to a "deflationary spiral" where nobody eventually buys anything, because they can get more the next day. That didn't happen where gold standard was applied. Maybe some people will not buy today, but they'll buy tomorrow when the price is lower and they want to enjoy their finite lifetime. A good example is the computers market - you can get twice as good a computer with the same price if you wait a few years, but people still do buy computers today.

Also, it's good to note that production cost doesn't equal value. You could start printing a currency of your own, but it's value wouldn't be equal to your printing costs. The value is zero if nobody accepts them as payment, or it can be more than the printing costs if many people accept it for payment and there's not too many notes in circulation. That's why I've found NewLibertyStandard's pricing by the production costs a bit misleading, giving the wrong picture to some people that bitcoin value is somehow bound to the electricity cost. He may of course sell and buy at whatever price he wants, but he'll be short on either bitcoins or dollars if it's not the market price (supply/demand).