FAQ on bitcoin FUD - http://justinvincent.com/page/2172/bitcoin-fear-uncertainty-... - Hope it's helpful :)
This explanation glosses over what I've always thought was the main problem with deflationary currency. Why would I want to use Bitcoins (or any other deflationary asset, for that matter) as a currency instead of an investment? It just doesn't make sense to the customer.
You wouldn't sell land that you own just to purchase basic necessities unless you had no other choice. In the same way, I'm not sure it will ever be a rational decision to buy something with Bitcoins unless you had no other choice of currency to use. I'm not an economist so I could be misunderstanding the nature of deflationary assets, but doesn't that imply that Bitcoins should be used only as an investment vehicle or to purchase things which other currencies can't (or shouldn't) be used?
The volatility actually ends up being a good thing in this regard because sometimes you are better off purchasing other goods with bitcoin, sometimes you are better off holding.
If the value eventually balances out and is truly deflationary against inflation then I don't think people are going to lose sleep over selling bitcoins that are going up 3% each year the same way they don't worry about taking money out of a savings account to buy something they don't really need.
It doesn't take any insight about bitcoin to arrive at that conclusion ("deflationary currencies are unusable, therefore don't bother hoarding bitcoin"); it's just logic.
I don't believe that, I think we can see that people are willing to sell it when there is something they want.
Also, for people living in "weird" countries, like Angola, there is often no way for them to buy things online since payment processors flag them as suspicious transactions.
To the extent that a currency becomes unusable in trade (perhaps as you say too illiquid due to hoarding), then that bids down its value, thus counteracting whatever problems arise from having excess value.
Generally speaking, arguments that it will fail because "deflationary currencies fail" are saying that it will be worth so much that it will be worthless. Even in the often-cited examples of deflationary currencies causing problems, the currency itself did fine -- people were still willing to "buy" it on favorable terms; it's just that the associated economy did poorly.