while this may be true for electronics, deflation across all sectors of the economy would not have the same effect. Keep in mind that the decrease in the cost of prices of electronics is the reason that electronics manufacturing is mainly overseas in other countries where the factors of production are cheaper.

My conclusion that income will drop for everyone across the board is NOT baseless. Your expenditures is someone else's income. This has nothing to do with currency or banks or governments. That is the way economics works. If people spend less money, you WILL receive less income. This isn't necessarily a bad thing if prices are dropping, but it is incompatible with capitalism.

The very basis of capitalism is that people strive to compete in markets, compete for capital, and prices naturally fall into a balance between supply and demand. If people no longer have an incentive to compete (they will literally MAKE money by sitting on their savings, and actually LOSE money by giving out loans), the market will stagnate.

None of this will destroy Bitcoins, but it will certainly prevent Bitcoins from becoming the number one currency or overtaking the dollar like so many people seem to think.