EC2 is NOT cost-effective at all for hash computations as I describe in detail in:

http://blog.zorinaq.com/?e=42

(This is the machine I built to develop whitepixel).

I'm not a bitcoins expert - but wouldn't any jump in the availability of bitcoins necessarily cause deflation, as with any currency?

If someone finds a way to generate,say, 5x more bitcoins that what the average expected amount is - they have a temporary advantage, but once those coins hit the market, the market is diluted and will quickly catch up.

Bitcoins has replaced mining gold with generating bitcoins - so it will be harnessing server infrastructure and good code / math -vs- digging big holes in the ground.

That's true. Also, as more computing power is added to its network, the difficulty of the hashing problem is increased to maintain the bitcoin creation rate at about 50 per ten minutes.

They say there is a limited amount of BitCoins, though - I think 21 million?

the difficulty of the calculations is adjusted so that 50 bitcoins will be released every 10 minutes. so this would only affect the distribution of bitcoins, not generation speed.