Ghostcrawler poked his head out of the sand last week to address item scaling. In particular, the fact that the exponential growth system currently in use is going to quickly get us into the ludicrous numbers range on our gear and, by extension, what we hit/heal/etc for. Most people have read it and missed one point though: they were obviously looking for feedback, which is why pretty much everyone has treated the discussion as an "either/or" debate between "Mega Damage" and "Item Squish", but they were also looking for other options to attack the issue.
So, I'm going to hit up both feedback and provide a couple other options.
Mega Damage is basically a work around for the reality that, if we were to continue to scale in power exponentially, the engine would need to be reworked to deal with the fact that we're going to be dealing damage in the millions... per hit. For a real world example of where numbers run into display caps, think of how, as you level your Characters in old Final Fantasy's, you'd eventually start hitting for 9999 damage and cap out. Similar restrictions currently exist within WoW (though, obviously at a higher scale), so Mega Damage is less about splashing the term round the screen and more about having to make sure those extreme numbers will display properly and can be processed by system on both ends.
Beyond the fact that I'm pretty sure Palladium Books has a registered trademark on that (which, given the state of the pen + paper RPG industry, may be questionable to tempt), GC's basically hit all the major roadblocks here: it's awkward and will eventually run into the real limitations of computing power - both locally and server side. The reality is that, as much fun as it may be, letting our numbers scale into infinity is going to make encounters look really, really strange.
I say that because there will eventually come a point when we're going to be standing in front of a boss with 999 Billion health (or more) and start pounding on him for 100 Million DPS/Player under this situation and that's just boggling.
Item Squish basically says we're going knock the exponential growth out from under the player at the end of each expansion, place all gear before the current/upcoming expansion back on (relatively) linear growth, and thus attempt to reset the curve such that we have more room to breathe. There are a few glaring problems with it:
1) Players potentially go from hitting for 40K DPS at the end of Cat to hitting for 4K DPS heading into MoP (for pure example: there are no hard numbers as to where we'd be), so you're likely going to log in one day and feel like you've been hit with the nerf stick; hard.
2) In scaling everything - gear, bosses, mobs - down, every single mob and dungeon encounter currently in the game is going to have to be rebalanced and tested against the new status quo because it very rarely turns out that you can simply "decrease by x" significantly - which is what would be required to get us all back to iLvL 200 gear by the start of MoP - without having any consequences to the encounter design. This is going to be a pile of work I'd really rather dev time not be wasted on or, worse, the Devs might handwave simply because its primary effect will be to screw up legacy content. Admittedly, this only needs be done once (theoretically), and then only for each expansion at the end.
3) It doesn't permanently fix anything; it just buys time as the high end of the curve gets pushed further out.
I can see why, in the either/or discussion, people prefer Item Squishing because it results in less obscene numbers in the end (for a bit), and that screenshot for Mega Damage is pretty dumb, but maybe it's time to consider other options as well.
Half way between Item Squishing and Mega Damage lies the idea that maybe, just maybe, we can allow gear to continue scaling but at a less obscenely fast rate. For example, maybe MoP gear only goes up by 600 Points in the primary stat slot by 5.3 instead of ~2100 points as per GC's example:
I like to call this the Rule of 600 (although, the number is flexible TBH), in that basically we're looking for non linear growth within a defined window of 600 points . You'd want a curve that backends most of the points while still seeing to it enough points are on the front end to encourage swapping out gear as people level. Although, with the addition of iLvL restrictors to the game, it's worth considering that there are other mechanics to incentivize gear swapping now. The big problem with this is that, in being a half way solution, it doesn't delay the scaling as fast as the Item Squish and still requires some attention to the Mega Damage problem. As well, the question is whether or not this will be considered "enough" of a "power increase" for people used to stupid levels of scaling - especially as a percentage of total increase/tier.
While the later problem is going to be somewhat subjective - though not to the math nerds - the primary benefit is that it would be hard to argue you got nerfed under this system because power would continue to increase; just at a slower rate.
If you wanted to absolutely clear the table though, there's a tried and true method for this in RPG's: The Hard Reset. Not so much from a: "It's time to have WoW 2.0* and put everyone back to level one", stand but more from a: "The Mists of Pandaria corrode/disables/etc your puny Azerothian gear. Replace it", position. This would attempt to replicate those situations where you'd go into zones ("Hell" zones are good examples of where you might need specific gear), and your gear just wouldn't work or the GM decides (preferably in consultation with the players), that you've accumulated too much Wealth/Power and it's time to have your ship get hit by a typhoon and you to wake up soggy in your nightclothes on a distant shore or an "enemy" gets the upper hand and strips you of your gear/position/power to try and bring some balance/challenge/strife back to the game.
This is the hardcore Item Squish in that, for the sake of argument, you'd basically want to do something like: "Azerothian gear is weakened to 10% of it's normal levels", and then build from there by replacing that gear with the gear you'd find in Pandaria that would scale from the new baseline. This is a bit awkward, in that it essentially creates a whole second "class" of gear and you'd likely want to swap back to pre-MoP gear to run old instances/raids. Running through pre-MoP quest zones is less of an issue because, though this is a bit easier for casters than weapon users, a Level 85 can still kill most 85 mobs naked if they're on their game. The solution to those issues may lie in the Challenge Mode Dungeons as it could also be theoretically possible to apply its normalization mechanic outside the dungeons to have MoP gear normalize to a fixed Level 85 equivalent set on legacy content. Considering that, the Hard Reset does offer some benefits:
1) The gear reset can be to any point Blizzard is comfortable with and scale as high as they want within an expansion in the same sense. This makes the Hard Reset the most effective permanent solution because, when we wander off to fight Sargeras + the Burning Legion in 6.0 his demonic realm can functionally do the same thing to our puny MoP gear, or not. It all depends on how often you want to wield the axe and how hard. Long term, this gives you the most flexibility because you're no longer delaying the inevitable, you're creating a mechanic and tools to prevent it.
2) You can also now consider other ways to scale the player under the new gear system or even from expansion to expansion; from enchants, raw player stat increases as the character levels, or even the addition of new kinds of gear slots and the like because you've now more space to shift power elsewhere.
3) You never have this awkward intermediate stage where you're fighting Deathwing one week doing 40K dps, then the 4.4 patch hits to push down the MoP changes and now you're feeling like you're back in Kara doing 4K because, under the Hard Reset, it's arriving on Pandaria that presents the issue and not a retune to the game. In other words, you don't need to deflate every character and pre-MoP encounter in the game to ensure damage in MoP doesn't scale out of control.
The downside? Most definitely a nerf to start at least. How much of a nerf depends on how you want to work this: is your Hard Reset going to basically just upend the status quo and set things up so you've room to breathe for another 5 expansions, or do you want to do something like a 50% debuff on prior gear every expansion so that you can do something like this:
That said, I'm honestly of the opinion that maybe the Hard Reset is the way to go because, as GC noted, sometimes it's best to just rip the bandaid off and this bandaid? It's the biggest one to yank by far.
* Folks, Cataclysm is WoW2.0