Well, if in some case EVERYONE loses their coins, they can just start the whole coin generation process all over again.

Some idiot loses his wallet. My wallet becomes worth more. No problem! 

Too bad one cannot find someone else's lost wallet on the street.

You mean by brute-forcing private key of the wallet owner or what ?

But of course there's no way to know that it is a lost key that was generated. It's more likely to be a key that someone else still holds but hasn't yet used to spend the associated bitcoins.

Anyway, the odds of that happening are so microscopically small that I'm not going to lose sleep over it. Also, I understand that a distributed system like Bitcoin can't have a central way to prevent duplicate keys, so I accept it on a philosophical level too.

Allowing this weakness to persist just because of the individual gain incurred by deflation is callous and corrosive to the system as a whole.

One need not be "stupid" to have an ill-timed (redundant?) house fire, or be the subject of a clever coordinated attack.

The system at the very least needs a way to liberate lost coins.

Coins that stay dormant for say 100 years are divided up among all current users? Is something like that possible? Ideally the problem should be obviated in some way, but as I say in the following post, those most capable of solving the problem are those least motivated to do so.

It's exactly why trickle down was laughable.

Related: http://bt.irlbtc.com/view/2436.msg33326#msg33326

It's hard to say how long deflation would take to kick in.  It depends on many variables not easily quantified.  Hell, even though we know, for example, roughly how much larger the USD money supply is today compared to several years ago, its effect on inflation hasn't really been seen.  The economy will have to pick up a lot more in order to create a sufficiently-high-enough increase in demand in order for us to see inflation.

lost coins will eventually be recovered when quantum computers become large enough... as the rest of the network will have already moved all the active coins to stronger addresses well before that time.  

But that may be at least 40 years in the future.

Quantum computers will not be able to develop to a threating size without it escaping public knowledge.
When it becomes likely that a quantum computer of a attacking size will been developed within the next say - 10 years. A security update will be developed that will make Bitcoin much more difficult to attack.

This update will consist of three parts:
1. Increasing the length of the hashes used for the block chain. (maybe SHA256 => XXX8192)
2. Massively increasing the asymmetrical private/public key length used to secure transactions.
3. Massively increasing the length of a Bitcoin address (the hash of the public part of a key). (maybe the new address will be 1024 + 8 character long)

This security patch will be released well before a quantum computer is developed to a stage that can attack it.  For anyones bitcoins to remain secure, they will need to 'spend' the coins to the new secure addresses.

Since 'lost' coins cannot be 'spent,'  they will on day be collected (and moved to new secure addresses) by somebody who can take the effort to crack the old (insecure) addresses.

Once, quantum computers become common, bitcoin could even use cypto that requires quantum computers to do the calculations, otherwise it would be prohibitory slow.