have i missed something?
i take it the algorithm is to be public domain, and the decrypt relys on the possesion of a password. This is called password protection. even Winzip does this.
it doesnt matter if your algorithm generates a key of aleph3 bits based on more random seeds than could be stored on every quark in the universe (assuming that physists discover that they are actually rather large sticky notes) - the encyphered text is only protected by a password.
Worse you have suggested that your algorithm allows for your more convenient, shorter kind of password.
what key would your algorithm output if the password was "dictionaryAttack"?