Why would I want to spend something that is bound to increase in value? We spend cash because we're inflating it every year and it's a bad decision to hoard it. With no inflation (at least eventually) it makes no sense. I think Bitcoin will have some utility as an investment or to convert currencies but beyond that nothing.
Correction. We spend cash because we need or want things. If the utility I get from the thing I'm want to buy give me greater satisfaction today than the value I gain in the future from inflation, then I will still spend the money. It's all about marginal utility.
If bitcoins are deflating rapidly, those bitcoins have greater marginal utility if you hold on to them. However if they are deflating very slowly (not inertially) then people will spend them to get something that provides greater marginal utility now.
Humans are capable of putting a price on time (determine the marginal utility of time). Inflation is not the only economic circumstance that works for trade to occur. Economics is very relative and reflexive. The only entity that truly loses in a deflationary environment is the government, because they can't steal from its constituents by printing money and devaluing the money its constituents are holding.
More important than deflation or inflation is relative temporal constituency in the value of money. So long as money stays are relatively the same value for long stretches of time, i.e. it isn't volatile, then humans are afforded circumstances in which they can make rational judgements of value and utility.
To this I add: If all of your assets and income were denominated in bitcoins, you'd still spend some of them. You probably need food, shelter, clothing, and transportation right now, or at least pretty soon, and so you would give up some of your bitcoins to get those things.
