edit: I should clarify that I don't completely disagree, just that debt is the real problem. No one wants to endure the short term pain so we keep "kicking the can down the road" as they say.
Pippa Malmgren - correctly, I think - describes this inflating away the value of the currency (and by extension, all outstanding debts) as just another form of default, and one that has been used many times in history. It's just more stealthy than saying "we can't pay, so we won't pay" or something similar[0].
I am rather shocked that anyone can't tell the difference between the effects of mild inflation on debt and default.
Debt is not a blood oath - it's just a tool. We're better off if we can use this tool and use it properly. With deflation, that's harder.
http://www.federalreserve.gov/faqs/economy_14400.htm
The markets, however, figure that out, and price that in. Which is why countries with weak currencies don't have an option to borrow in their native currencies.
Regardless, I think its important to point out that a slow and steady deflation is actually an ideal or at least a reasonable state for an economy.
The ideal state for an economy is one where the rate of inflation/deflation is determined by the market. This would happen if central banks were disbanded and the production/circulation of currency was left to a (regulated) private sector with a healthy number of competing companies innovating to have the best currency on the market.
What we are seeing now is a natural adjustment to years of accumulating debt under an artificial, inflation-targeting central banking system. Central banks have tried their best to prevent deflation in order to support the debt-driven "fractional-reserve" system that has created an unsustainable network of debt that is no longer tied to the productivity of real assets. A system of competing private currencies would remove artificial signals manufactured by central bank monetary policy and gov. fiscal policy.
In real life ceteris is never paribus, of course.
2. Yes, but would you use Honest Achmed's Used Cars and Dollars?
3. (Private) Ratings Agencies would rate currencies and maybe each other. The market picks the winner based on trust, convenience, or whatever else it cares about.
In practice, I'd expect an 80/20 rule. Two currencies would make up 80% of all transactions in a given region, with a rather large tail (gold/silver/basket of commodities backing, fixed exchange rates, etc). Multiple currencies is nearly unworkable with paper money, but quite trivial with digital paper money.
Hayek also wrote a great paper on the subject in 1990. In it he quite presciently predicts the current conundrum of the euro zone and makes the case for competing physical currencies. He realized that this would never happen in his lifetime but went through the the intellectual steps nonetheless. Virtual currency could make his thesis possible.
Check it out if you're interested: http://mises.org/library/denationalisation-money-argument-re...
It is possible that the previous evils of deflation no longer apply ( because technology) , but I'd rather not find out through experiment.
Consider how much doesn't get invested by the poor and middle class into education, paying down debts, or retirement savings accounts. It feels rather absurd to suggest that they would somehow benefit from continually raising the price of something they need to buy.