OMG INFLATION!!! THE SKY IS ABOUT TO FALL!!!

The topic of inflation came up in comments to this post, and I wanted to write something that explains how inflation works with steem. What seems to be troubling people is that the curation, and posting rewards, along with the interest earned on steem power, will cause the price of Steem to crash.

The first thing that you have to keep in mind is that Steem is not currency or money. It is a commodity like gold, tea or wheat. This is true for all cryptocurrencies. The term (as well as the use of the word 'coin' in most of them) is an unfortunate misnomer that has endured because there many situations and discussions where the distinction is mostly academic. Its unfortunate, because it has most people running in circles when they encounter a topic like inflation, where the difference between a commodity and a currency is critically important.

Inflation means an increase in the price of goods and services. When prices increase, you can buy less with your money. So inflation means higher prices and higher prices mean the money you have buys less than it used to buy.

Which is to say that inflation is something which decreases the value of money, because it dereases the amount of things you can buy with money. What you have to remember here is that Steem is a thing, not money.

How does inflation happen? Well there are a bunch of models to explain why prices increase. The classical economics, Milton Friedman explanation is that inflation happens because of an increase in money supply. This is the explanation that typically gets thrown around when people point to inflation potentially causing cryptocurrencies to lose value. In fact, the term inflation is used colloquially to mean the increase in money supply (though thats not what it means in economics or finance) Keep in mind that just about half of the professors at any economics department at any university in the country would call the classical explanation an outdated myth.

But even from a classical economics perspective, this type of inflation won't work with steem. Yes, with currency , the classical economist believes that increasing the supply ultimately decreases the value. But its more complicated that the government prints some money, then you go to the store and the shop keeper tells you "well, the money supply has doubled. So the loaf of bread that used to cost one dollar will now cost two dollars, because i denominate my prices as percentages of the total available money supply in the country"

The actual process of classical inflation is much more complicated. It goes something like an increase in the money supply means a decrease in interest rates. A decrease in interest rates means that conumers can borrow money more cheaply, and also means that they have less incentive to save. Consumers having less incentive to save and easier access to low interest credit means a greater demand for goods and services. Greater demand means less price competition at the same supply point. less price competition causes an increase in price of goods and services. None of this really applies to crypto currency. There isnt a crypto federal reserve to get the "money" into circulation by lowering the cost to obtain it.

But all this steem, won't it flood the market? Thats not really inflation, but regardless the short answer is no. This newly created steem is denominated in steem power, which means that it can only get to the market incrementally.

Also, the supply of every cryptocurrency increases. Every single day, $1 million worth of new bitcoin is made (and before the halving, it was $2million). Whats causing misgivings here isn't the fact that new "money" is being minted, its that we can see it happening at the bottom of posts and in out steem power balance.