This is the world deflationary currencies lead to--referring to the real world where inflationary currencies reign? Seeing how inflation doesn't prevent mis-allocation of resources, I don't see how this example is a good argument against deflationary currencies.
Even in a world of inflationary currencies, there are supply-limited assets like real estate in Manhattan or Paris. The phenomenon you see with respect to those assets: hoarding, little incentive to risk assets by putting them to use, young people pushed out simply for being unlucky enough to be born later, dynastic wealth, etc, are just what happens when you have assets that are tightly limited in supply and appreciate just by virtue of one's holding on to them.
The question is: why on earth would you want to make more things behave that way?
This is not an argument against crypto-currencies, by the way. One can imagine an inflationary bitcoin after all.
Hoarding real estate in Manhattan or Paris only works as long as those assets continue to appreciate in value. Assuming demand for those properties is always increasing, how would you propose to put a curb on their prices?
As far as making a currency behave this way, I would say it's entirely unprecedented to have a currency that is both deflationary and infinitely divisible. The incentive to hold on to the currency may be strong, but there will always be incentive to take risks for even greater gains. Just look at how ASICMINER shares have risen.
As long as the overall economy continues to grow, Manhattan real estate continues to appreciate.
Infinite divisibility is irrelevant. That's not the problem. The problem is that the first people on the scene (I.e. Old people) end up with all the wealth.
There's no easy way to sell one square foot or one square inch of Manhattan property. First movers will always be at a competitive advantage in nearly any endeavor.
