Capacity utilization is driven by demand.

This orange line represents capacity utilization.

And capacity utilization had really preceded that.

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

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.

My answer is, just watch the capacity utilization numbers.

Capacity utilization drives inflation. We can all buy that.

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

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

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.

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

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 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

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.

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

Filesystem Utilization Viewer

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.

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

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

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.

Capacity

Capacity

Capacity

Capacity

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

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.

Low utilization, prices will decrease.

Low utilization, you have kind of the opposite situation.

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.

Used Capacity

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

Thrusters at only 30 of capacity.

He's only running at 25 utilization.

So those are the two side effects of high utilization.

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.

These are our two major bouts of inflation, in the early 70's and in the early 80's, and those were when we had extremely high capacity utilization.

And won't the wholesale printing of money drive demand to go up, and then we'll have very high capacity utilization, and then we'll have inflation or even hyper inflation?

All of the factories are nearing capacity.

Maybe it had one gigabyte of capacity.

And one of the issues is capacity.