Good point, Lin!
Leda, yes when particles collapse into each other, it fills any tiny spaces that previously had air, essentially suffocating the roots. For a while, things will be OK, then a decline as roots can't get any air except at the very outer edge of the root ball, along the sides and bottom of the pot. That's not a normal root structure, but often found when repotting plants - a hollow sphere.
I'm not much of a seed starter except to scatter them on the ground, but vermiculite has a large following from the seed-starting crowd. It's usually cautioned to not pack it down, and to moisten it carefully, not pouring water which can also cause it to compact/collapse (which is also advice I'd give for potting/repotting plants even if the mix has no vermiculite in it.)
When roots have plenty of oxygen *while* they are moist, theoretically they can't rot, and in practice, this holds true unless you are really pouring water on there constantly, and usually with the aid of a usually-full drip saucer.
