Capacity utilization is driven by demand.

This orange line represents capacity utilization.

And capacity utilization had really preceded that.

My answer is, just watch the capacity utilization numbers.

Capacity utilization drives inflation. We can all buy that.

So high utilization of capacity, it leads to prices increasing.

So we're all tapped out, we're at 100 capacity utilization.

And the traditional notion of capacity utilization, and this is what my brain does when someone mentions it, is I think of industrial capacity utilization.

And notice, it was preceded by an uptick in capacity utilization.

Our factories are working at full capacity.

The factory is running at full capacity.

And if you go a little bit lower, it tells me capacity utilization.

And the inflation really started going once capacity utilization got into the 80 range.

As we said in the last video, the orange line is U.S. capacity utilization.

So this is more recent, where we see that capacity utilization started falling off.

He operates at 400,000. He operates at full capacity.

But the interesting thing, just falling into the cupcake economics and this whole notion of capacity utilization, is that inflationary periods are always preceded, at least all the data I have, by increases in capacity utilization.

And in doing so he just operates at full capacity.

So the point I want to make here is capacity utilization really is the driver of inflation.

And going back to where we started this video, in terms of capacity utilization and what that might do to prices, this tells us that labor utilization is

Filesystem Utilization Viewer

So, if you saw right here, wow, capacity utilization is starting to go up and actually, another interesting thing is to see what threshold of utilization starts to trigger inflation.

It isn't so much the money supply, although the money supply will have an effect, it's really capacity utilization.

So that dynamic that we've been talking about, capacity utilization falling off, because we essentially had a demand shock.

I've done a bunch of videos now on inflation and deflation and how they can be impacted by capacity utilization.

And if you think about it, industrial capacity utilization, it matters, but it matters much more to manufacturing based economy.

Capacity

Capacity

Capacity

Capacity

So the orange line is utilization. Up here we had like 90 utilization.

Likewise, if you're running near full capacity, there's a huge incentive to raise prices.

Low utilization, prices will decrease.

Used Capacity

So up here this is 90 utilization and then down here this is 70 utilization.

He's only running at 25 utilization.

So over here, you say, OK, when inflation really started turning around, we were at a capacity utilization of roughly 83 , 84 right there.

But this is just our capacity, our productive capacity.

But this orange I'll do it the same color, this orange shows capacity utilization, and the starting date right here, I think it was 1967.

And I want to give him full credit because he really is who pointed out a lot of this to me, but I think it's very instructive to the capacity utilization and inflation deflation argument that I've been making.

Server at capacity

Large Capacity Tray

And then, when you have that extra capacity, everyone's incentive is really to lower prices so that they can try to grab some of that utilization.

And that's the real big take away I wanted you to get at, is that high utilization of anything, of our aggregate capacity, prices will increase.

And you'll have very high utilization of all of the capacity in the island and you might have inflation, even though the money supply is one seashell.