My feeling is that Steem is overly complicated, especially for the mainstream audience it's trying to reach, so I actually like that they created the concept of STEEM POWER to simplify things. If the majority of people on here who are struggling to understand basic cryptocurrency concepts had to now deal with VESTS too I think it would really be too much.
That being said I think information about VESTS and how STEEM POWER really works should be more easily available and visible for those of us who prefer that level of detail.
So holding STEEM as opposed to VESTS sucks
Yes, the only downside to holding VESTS is the long-term commitment. If you are ok being invested for the long term then there's absolutely no reason to hold liquid STEEM (except maybe to pay for a few things here and there).
Now what happens if everyone sells their VESTS for STEEM? This would decrease the total number of VESTS. Does the number of new VESTS created also go down? In other words, is the inflation rate a percent of total VESTS or a set number of VESTS?
The number of new VESTS that are created is governed by the overall inflation rate of the platform, which includes both liquid and vested STEEM. It is not affected by at all by powering up or down.