Quote from: GrandmaJean on September 02, 2014, 03:26:47 AM

This situation would be very unlikely to happen in the real world. I would say that most people that have the ability to acquire bitcoin also have fiat based assets they can spend.

Even in your situation, people will delay consuming for as long as they can because they think the value of bitcoin will increase. This will ultimately lead to lower economic activity because people will delay purchases for as long as they can hold off.

The reason that the level of bitcoin economic activity is where it is now is because some people do not think the price will always rise, but rather there is some chance it may not.

But, as the value of Bitcoin increase and the value of fiat decrease (based on relative inflation rates and adoption rates), if you have a balance in Bitcoin and a balance in fiat, the share of your wealth denominated in Bitcoin will increase compared in the share of your wealth denominated in fiat.
At some time, the share of your wealth denominated in fiat will become irrelevant compared to the share denominated in bitcoin.

The question about economic activity is a trope of keynesians, pseudo and post.
The problem with an inflating currency is to push for too much economic activity (investing and consuming). Economic activity is too much compared to the ability of the system to support it. People engage in too much consumption, not enough savings, too much investing and not enough savings. I wrote about "NOT ENOUGH SAVINGS"?
Until the effect of increasing the money supply last, people do not realize their investments are a failure. But as the effect wore off, the investments done because of inflation must be liquidated at a loss (for the investors or someone one else like the taxpayers). Then the government push for another round of inflation (lowering interest rates). And another, and another. Until interest rates go to zero. They they can not do anything, because the currency become, essentially worthless. In the mean time they have favored debtors and consumers at the expenses of lenders and savers.

People saving, AKA people producing and selling good and services without consuming, stop working as hard as before, because the value of their savings lose value and they can not same more of a certain amount.

People saving 50% of their income can not save more than 5 years of their income in currency in inflation is 10% every year (increase of money supply), because at the end they lose exactly as much value as they add (they are working for nothing, essentially). So they decide to spend more in consumption now because they know they will not be able to consume it later. But this take away real savings - like briks, mortars, wood, drugs, etc. - from people looking for loans to start productive enterprises. And given less stuff is produced and more is consumed, prices start to go up.