Significant deflation is harmful to economic growth. Here I am using the term “deflation” in the widely-accepted meaning, i.e. a decrease in an economy’s general price level. When deflation is used in the cryptocurrency sphere, often people mean “decrease in the money supply” or “decrease in the rate of growth of the money supply”.
Deflation is harmful to economic growth and welfare because it encourages people to hoard money rather than spend it. If you don’t believe in this phenomenon, I encourage you to visit some BTC communities where spending of BTC is discouraged due to a belief that its purchasing power will increase in the future.
Efficient allocation of factors of production and goods and services toward their best use is a major benefit of free markets. Slowing the allocation through deflation prevents the free market from fulfilling one of its main roles. At the extreme, extreme deflation can turn into autarky at the individual level.
An unchanging money supply generally will lead to deflation. Why? Examine the equation of exchange:
M * V = P * Q
where, for a given period,
M is the total nominal amount of money supply in circulation on average in an economy.
V is the velocity of money, that is the average frequency with which a unit of money is spent.
P is the price level.
Q is an index of real expenditures (on newly produced goods and services).
Q is basically real GDP. As a simplification, assume that V, velocity, is constant.* Then it is easy to see that if there is economic growth, but the money supply M is constant, then the price level P declines. That’s deflation.
I know of few macroeconomists more hawkish on inflation than Milton Friedman. One of his proposals was to have central banks step back from active management of the money supply and instead commit to a fixed percentage increase of the money supply every year indefinitely, targeted roughly at the expected rate of economic growth in the future so as to keep prices unchanging. This is the K-Percent Rule.. So even Friedman probably would not have support BTC’s (and Zcash’s) eventual transition into an unchanging money supply. And as has been pointed out above, the issue of permanently lost private keys makes the problem worse.
* : Central bank policy can affect the velocity of money. For example, over the last decade or so many central banks have created a large amount of money through quantitative easing and pandemic support policies, but the money has been stashed in places in the financial system such that it isn’t readily spent, and therefore velocity declines and inflation is less than the rise in the money supply. Note also that the equation of exchange is not an economic theory, but rather an accounting identity; velocity is defined in terms of the other three easily-measured quantities. However, subjective views on which variables in the equation of exchange are exogenous and which are endogenous do shape competing economic theories.