This is a good point.  I don’t think I underestimated people’s ability to generate bitcoins efficiently and legitimately – the difficulty adjustment does a good job of compensating for that, and that makes it a non-issue in my scenario.  But I probably underestimated the effect of minters using other people’s resources without their knowledge and consent.  The FAQ theorizes that the cost of minting will approach the price of electricity minus a thin profit margin, and I probably accepted that theory too uncritically. If resource theft becomes the primary way to finance bitcoin minting, flaws in the difficulty adjustment will have a more subtle impact.

Some places where generation will gravitate to:
1) places where it’s cheapest or free
2) people who want to help for idealogical reasons
3) people who want to get some coins without the inconvenience of doing a transaction to buy them

There are legitimate places where it’s free.  Generation is basically free anywhere that has electric heat, since your computer’s heat is offsetting your baseboard electric heating.  Many small flats have electric heat out of convenience.

How expensive is heating oil?  With the price of oil so high, if it’s actually more expensive than electric, then generating would have negative cost.

There’s also kids putting it on their parent’s power bill, employees their employer, botnets, etc.

Case 3 comes into play for small amounts.  The overhead of doing an exchange doesn’t make sense if you just need a small bit of pocket change for incidental micropayments.  I think this is a nice advantage vs fiat currency, instead of all the seigniorage going to one big entity, let it go in convenience amounts to people who need to scrape up a small amount of change.

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