Our current system is debt-based. If you take out a loan/mortgage in dollars, the bank wasn't previously holding those dollars, they get created upon your agreement to repay. So "who in their right mind would hold the dollar" is already true today.

Under a Bitcoin standard, lending and borrowing will become less common, because it's tougher to pay off in a deflating currency. Higher risk of default means more stringent conditions for lending, which means fewer loans.