Today's currencies are based on government. They are fiat money in that sense, ok.
Bitcoin is "pure fiat" as in "based on trust of the people, by the people". Notice how the government word is absent. I don't think we had that before - at least, not in a way that can not be easily abused by the government.
[there are some counter examples, independant central banks following a monetarist policy of say 4.5% M3 aggregate growth in the EU. The ECB (european central bank), unlike the FED, is almost independent from the government, but still political power managed to create funny mechanism to buy back sovereign debt, which now results in Cyprus style situation. politics and money do not mix well]
The "friction" you ignore is the bid/ask spread and volatility - bad things in any international trade. It's called currency risk and it makes import-export companies take money-market positions for a good reason.
There is also the risk of rampant inflation aka "shoes leather cost" - the best example is when talking about people in the Weimar republic who were paid an always increasing salary twice daily and immediately cashed out all their money because of the crazy inflation. You should like that - so many money changing hands at a high speed must be a good thing for the economy!
Joke aside, your understanding of economics seems very tainted by political correctness, but you correctly noticed I should have added more details, at the risk of creating a contradiction. This is a very valid critic.
The "dead stock" is theoretical - even more with pure fiat money:
- With gold, that could have been a problem, due to storage costs and alternative uses (gold is a very conductive metal, and apparently is also enjoy as jewelry by many people.
- With fiat money, some issues remain, like storage costs, but the risk of inflation is an even bigger issue.
- With a "pure fiat" money, since there are little alternative use, and even better in the case of bitcoin - no risk of inflation, the problem may vanish altogether. People invest just because inflation makes keeping cash a bad idea.
When you reduce the frictions (transaction costs, etc) and remove the risk of inflation, why not convert money to stuff you need "just in time", ie when you need it, instead of wasting time and effort to store it and look for bigger yields due to the frictions and inflation? Presently, you want to do everything you can to avoid losing capital, which creates a game theory problem for other people who have to play the same game you do. But if you remove the problem, you remove the incentives for such behaviours.
Which leads us back to what money is. You can't eat money, or sleep in money. But since you can convert it whenever you need and there can be no inflation, why bother being a rentier when you remove the risk of inflation? In fact, it might be harder to be a rentier, since instead of funding "minimal returns" (ie just a bit more than inflation) investment project of any kind, one would have to aim for "high returns" - as in startups, ambitious companies, etc.
That clarification aside, the core difference with the current system is that by removing inflation, no one will be forced to earn more and more money just to maintain a status-quo (except by your own new needs of new things - we are not hippies, most of us want new shiny things - the economy won't stop).
The removal of this coercion will make useless and redundant all those who currently live on this man-made coercion called inflation.
10% of the GDP is the financial sector - and just how many bright people are employed doing that? That's a lot of freed human capital, which could be put to better use (bring mankind to new planets) once the problem is solved. Bitcoin solved that, and the market is noticing.
If you are not sure about inflation, let me be crystal clear - it was not a bad thing when money had to be a precise unit of accounting matching the growth of the real economy, but with today's computational power (bitcoin can be divided) and networks milliseconds latency, it's not required anymore.
Stock market analogy- instead of printing more shares, companies sometimes divide them, and let the market price each division. It seems to works quite well.
Now with deflation - the great depression was turned into a real problem with the productivity of that time, countries could barely feed themselves. Less people working meant a severe shortage risk. That's not the case anymore, with the amount of agricultural surpluses we have.
I'm not blaming you for your interpretation. Just like you, I believed the lack of inflation was a problem in BTC - or that at least it should happen at a given rate to follow a monetarist approach, or that having so many bitcoins gone to the initial adopters was "unfair" for the newcomers. Now the more I see it, the more I see it as a game changer in a good way. 10% of the GDP spent every year on a problem that is now solved - I'm sorry but even if you give these 10% to those who bootstrapped bitcoin as a one-time payment, this is a steal!
I sincerely believe that in todays economies ONCE THEY USE BTC a similar situation of what in the past were problems caused by inflation or deflation problems will create instead a long period of sustaining growth - by putting human capital to a better use than solving the problems we ourselves created.
How do the keynesians explain this stagflation BTW, not enough stimulus ? Not enough gas being put on the fire ? (or maybe, demand style economics proved to many people the game was rigged and the best move was not to play, since parasitic living was a rewarded option)
You talk full employment, etc, so let's go further with your theory and take an example:
Milton Friedman visited China in the early 1960s and was taken by a government official to see a public works project. Chinese workers were building a canal. Friedman was struck by seeing everyone digging the canal with shovels. Friedman asked the official, "why no heavy earth-moving equipment?" The official said, "oh, this is a jobs program." So Friedman then says to the official, "then why don't you just give them spoons instead of shovels to create even more jobs?"
Here "full employment" maintains the inflation coercion while managing rentiers capital, is tedious and pointless - just like digging with spoons. So what exactly do you like so much about the current system?
Bitcoin is like a big experiment. The current system is adapted to a generous and social human nature with very few asocials. If the human is as good as that, this system as nothing to fear. Why would anyone want any BTC? After all, most would believe and trust the government to manage the money. But if people don't, then bitcoin is the solution.