"Current institutions within state finance dictate the rate at which monies created."

_{Sensei Teekay crunching some numbers}

What happened yesterday!?

Yesterday I posted about a potential reversal on the STEEM charts, and by the end of the day we had returned back to our lengthy downtrend. Despite everything I had mentioned and, the introduction of some extremely fundamental changes to both the platform of Steemit and the infrastructure it's built, the price has continued to decline.

There's one reason for why it didn't retrace and I believe that reason is Inflation.

. . .

Today I will attempt to school you guys on what inflation is, why it's the problem, and how it can be fixed.

Inflation

If you're not economically savvy, then let me break it down for you in laymen terms.

Just as a basket ball inflates over time with air, a currency also inflates over time with its creation. As a money supply is created to keep up with the rate of demand, the supply over all becomes much larger and therefore more accessible. The more accessible a currency is, the more easily it can be bought & sold. If a currency is being created at a far greater rate than which it's being sold, then that currency depreciates in value.

When it comes to debt based economics, a currency is based on the idea that it's worth something at the point of sale. This means that it's a derivative because its actual value is derived from something else. To put that in a more easier to understand way, STEEM is only worth what it's valued on the market at the time of sale. There is no fixed value to STEEM, which is the case with all derivatives. It fluctuates over time and that fluctuation of price is dependent on what its market is doing.

Right now the current market sentiment is this: There are many more people selling STEEM than there are people buying it, and that's because there's a lot more STEEM to be sold and very little incentive for it to be bought.

In recent changes we've since seen a change in rewards which has resulted in an increase of STEEM being created and a decrease in Steem Backed Dollars being created. This is, in my opinion, was a bad decision. By increasing the creation of STEEM, you potentially increase inflation. As of right now there is over 1 Million STEEM up for sale on the markets that trade STEEM, and as rewards are continuously given to content creators, the amount of STEEM being sold increases.

This is a classic example of why inflation needs to be managed. Supply & demand is a fundamental aspect of economics. If there's too much supply, then there is little demand and that supply becomes worth less. So, just like the basket ball, if you inflate it too much it will eventually explode and become worthless.

Disinflation

When it comes to economic stability, current institutions within state finance dictate the rate at which monies created. Federal banks decide announce different policies throughout the year to slow inflation & deflation within the market. This is called a Disinflation method. There are many ways that banks choose to stabilize their currencies, and each policy has its own purpose.

When it comes to excessive inflation, the result is a deflation in price. In a debt based economy, taxation is created to decrease excessive inflation by insuring there's a continuous revenue stream. A revenue stream is essential in keeping a currency afloat as it creates a perpetual supply of income. If a currency does not have a guaranteed value then it's value is based entirely off of speculation, which is what we see with STEEM.

STEEM currently has a yearly inflation rate of 100%. Because STEEM is doubling annually, the selling of STEEM would also need to double annually. STEEM relies on investors to keep it afloat. Technologically it's a good investment, however because the rate at which Vests are created & sold far exceeds the rate at which they're being purchased, the value of its Vests eventually become worthless.

My Proposal

The solution to this problem is obviously to decrease the rate at which STEEM is being created. However, by simply decreasing the creation rate you're only patching the problem for a limited time. If we only decrease the rate at which STEEM is made, we will eventually face the same issue because supply is still increasing.

I propose that we introduce a taxation on rewards & an annual share of dividends.

By introducing a taxation method we can in turn recirculate the supply of STEEM and decrease the rate at which it's being created. This reduces the amount of STEEM that can be bought & sold and increases demand, therefore increasing the value of STEEM. And, because the underlying technology of STEEM has intrinsic value, keeping STEEM within its own economy and off of the markets, introduces a revenue stream whereby the economy pays for itself.

Eventually though, with this taxation method, you will face an excess of supply within the economy just as you did on the market. I propose that that by introducing a dividends for Steem Power holders we can distribute that excess among our investors, easing inflation even more and creating an incentive for investors to buy STEEM. By creating a real incentive for investors, you create an actual revenue stream which is not based off of speculation. Banks pay dividends to their customers for the exact same reasons. Because we operate without transaction fees, there is no revenue stream. If we create incentive for investors and a reason for Vest holders to retain their Vests, we will not only decrease the amount of STEEM being sold, but we will also increase the amount of STEEM being purchased, which increases the value of STEEM on the market.

. . .

These are simple fixes, and obvious ones. If you have other ideas or would like to propose your own solutions to the problem, please do. With recent changes, witnesses can now vote to introduce new proposals on the Blockchain. We as a community can help Steem & Steemit by introducing proposals of our own for which they can vote on.

Thank you for reading.

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Thomas Te Aroha Kohi | Entrepreneur
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