In what way, Etlase2? A currency is simply a market product with a well defined trade value, by whatever means that trade value is defined. The laws of supply & demand most certainly do apply to currencies.
Because somewhere I stated or implied that the laws of supply and demand do not apply here.
I think you should read up on his blog posts from 2005 until now and ask yourself that question again. The guy is total common sense. Not that he is fault free, but he surely is intelligent.
He is considering prices in a vacuum, which the same mistake everyone who says "herp a derp look at electronics" makes. With wages increasing at the same time certain products' prices are decreasing, the marginal propensity to consume the products with falling prices can only increase as income becomes comparatively more disposable.
On the other hand, if wages are decreasing, as they must in a deflationary currency, the marginal propensity to consume is unaffected assuming that prices are falling at around the same rate. If prices on certain products are falling faster, then it is a wash to the scenario above.
Personally, I think the whole "people won't spend in the face of falling prices" is either misinterpreted or argued incorrectly. It is not the basic consumer that anyone has to worry about, it is the investor and job creator that one has to worry about stopping cash flow through the economy, causing job losses which then do cause less consumer spending, and spiraling downward economic output. Deflation vs. inflation will hardly affect those who spend the vast majority of their income, assuming wages and prices are reflected similarly. Basic arguments about consumption totally ignore the greater systemic risk posed by deflation.