Inflation happens when the symbolic money cannot be physically backed up. The US treasury maintains an enormous sum of gold used to back up the dollar. When the symbolic paper dollar is produced in mass quantities each dollar then represents a smaller portion of that gold, therefore decreasing its value.
But Nixon took us off the gold standard. The whole point of that was so we wouldn't have to rely on having an equivalent amount of gold.
yeah. Actually the thing that backs it up is confidence. By the way, how would the 2009'ers cashing out lead to a spiral of doom?
Remember that value is based on the amount of trade using that currency divided by the amount of that currency in circulation. By people caching in and therefore adding their bitcoins back into circulation, this is now increasing the amount of currency, but not increasing the amount of trade. Basically, you're now dividing by a much larger number, so the value will plummet.
Once the bitcoin's value has decreased, prices will skyrocket, but people won't have enough bitcoins to afford any of it. It's basically the same thing that happened in the Great Depression, and also similar to what's happening now in this recession. Value of currency decreases, so prices increase.
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