WoW: The Great Item Squish

MMO-champion has a blue post on the homepage addressing problem that has been lurking in the background of WoW since the first expansion: For how long will stat / damage numbers continue to increase? It's an interesting problem, and I wonder what others think about the situation and how they would solve it. Blizzard offers two solutions:

1) Mega Damage: Damage and stats would continue to increase at exponential levels, but instead of a fireball doing 6,000,000 damage, it would do 6 MEGA DAMAGE.

2) Item Level Squish: Reduce all stats in the game (characters, mobs, bosses, gear) to more manageable levels.

1 seems like a silly solution. Why not just display the 6,000,000 damage number if a character does 6,000,000 damage? 2 seems sensible, but creates a problematic aesthetic for the gameworld. We already have the problem of greens replacing purples every expansion. Now we'd have another reversion of progress by lowering the numbers every few expansions. Right now with all of my stats I have, say, +7,000 to spell damage. It seems weird that a new expansion, offering progress and increase to my character, would also revert my numbers to put me at +700 or +70 spell damage.

The number reversion solution also creates an interesting compression problem at the lower end of the game. If the lowest level mobs in starting zones have, say, 50 health do we compress them down to 5, to keep them in scale with the high-end boss health decrease? If so, wouldn't this create a problem after two or three world-wide stat compressions?

Something to think / talk about if it interests you: If you created a game that utilized stat increase as a game mechanic, then how would you deal with the exponential increase in stats over time?