It's like the difference between "his car slammed into that other car" and "he was drunk". Drunk caused the accident. Accident caused the damage.
You talk about that deflation as if it just appeared out of thin air, but it was the market's natural reaction against over 25 years of Fed policy of papering over asset price corrections with massive credit injections. 1987, the Latin American debt crisis, LTCM, the tech bubble bust ... every single time, the Fed's solution to the "problem" of falling asset prices is to bail out the speculators with easy credit.
It will be much harder for similar credit bubbles to form in Bitcoin in the absence of a central bank (or even, as far as I can tell, a means of fractional reserve banking). Of course, we are witnessing periodic non-credit driven bubbles right now, but I think these will become fewer and far between if the BTC market becomes more liquid, and particularly if a means of shorting BTC comes into existence.
I don't understand this logic at all. BTC is primed for speculation, bubbles, and deflation, because it has a fixed or slow-growing supply and no automated procedure for fighting deflation by printing money. In other words, it has no central bank. There's no way it can prevent deflation and speculative bubbles. And yet as the BTC population grows, you think that speculation bubbles will reduce? That's a pretty out-there argument.
Depending on how you measure it, the share of credit which comprises the USD money supply dwarfs the amount of actual cash by something like 100:1. The cause of the deflation in the 2008 crisis was a sharp contraction in the amount of that credit, and the crisis only ended when that contraction stopped, not because of the Fed's relatively much less significant cash injections.
The sorts of sharp, catastrophic deflations that took hold in 2008 (or 1929 for that matter) are always caused by the bursting of a preceding credit bubble, usually created by central bank policy. I don't see how that kind of bubble can happen in Bitcoin. So the argument that "Bitcoin is deflationary" is true as far as it goes, but that doesn't mean that a Bitcoin-based economy would necessarily look exactly like, say, the Depression-era U.S. They're two very different kinds of deflation.
In the absence of major inflows & outflows of credit, the addition of liquidity to a market usually reduces the severity and frequency of big price swings. The very difficulty of issuing credit in BTC may very well prevent it from becoming a viable currency, but I think it's also an important brake on speculation.
Bitcoin has already had catastrophic deflations: factors of two in less than a week and factors of three in less than a month. And equally spectacular speculative crashes. The reason for this is really very simple: there's no one at the tiller, printing money to tamp down the speculation.
The kind of deflation I'm talking about -- and I think everyone on HN is talking about -- is the kind associated with speculation. If Bitcoin can't discourage speculation, and it appears by design it cannot, it is dead in the water.
So who's printing gold to temp down the speculation in that? Or what makes gold different so that it doesn't need a "central bank"?
But, here's the thing: few people have ever suggested that we actually do our regular, day-to-day finances in market-value bullion gold. Instead, it's just considered a good way to back or hedge against actual, managed currencies.
Bitcoin stands a chance, IMHO, if people get off their ridiculous Austrian Economics shtick and start treating it similarly to gold: Bitcoins as hedge against financial shenanigans in other currencies rather than Bitcoins as a way of paying your bar tab.
Basically, as bad as central bank meddling is, the alternatives are far, far worse - look at the boom/bust cycles of the 19th century. For the most part, competent central banks prevent both hyperinflation and deflation through controlled expansion of the money supply.
But more to the point, even the 19th century cycles were intimately tied to the credit cycle. It was just created by private banks operating on fractional reserves, as opposed to a central bank. There is no fractional reserve banking in Bitcoin. (Which, again, may be a reason it will never take off as a currency, I'm not sure.)
As you point out, there's no obvious way to do fractional reserves, so it can't be used for debt-based capitalism unless someone comes up with a clever mechanism for that, something deeper than commodity-as-collateral. Avoiding the currency hazards of modern capitalism by not being able to perform the underlying operations of modern capitalism is kind of cheating. And if you can do lending on fractional reserves, how do you know the hazards of reserve currencies aren't a function of fractional reserves rather than a scalable money supply?
I would argue that while the dependence on credit is real, it's not due solely to banking. The real dependence on credit is simply because wage levels are so low that most people cannot afford to pay for their lifestyle in cash, and are not even expected to do so.
When you configure the economy such that buying cars, houses, health-care, education, weddings, births, and burials almost always requires credit, then that economy will become intimately dependent on the credit cycle. If you don't like it, then you need to raise wages, reduce inequalities, and oftentimes even nationalize certain vital services, until ordinary citizens can go through life maximizing the amount of goods they pay for in cash and minimize the amount of loans they need to take out.
Otherwise, expect your society to be enslaved to the creditor class.