Inflation, deflation, and capacity utilization 2발음듣기
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Inflation, deflation, and capacity utilization 2
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In the last video I spoke a bunch about the determining factor on whether we have inflation or deflation.발음듣기
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It isn't so much the money supply, although the money supply will have an effect, it's really capacity utilization.발음듣기
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And I made that distinction because - I gave that example of the island, where you could have a very small money supply,발음듣기
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for example, one seashell, but if the velocity is really high, the people are expressing that demand.발음듣기
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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.발음듣기
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On the other hand, let's say, we found a bunch of seashells, but everyone stops transacting, so the velocity were to slow down a bunch.발음듣기
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So in that case, even though the money supply is huge, or a lot larger than it was, people aren't expressing demand.발음듣기
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As we showed in the cupcakes economics video, when you have a lot of unused capacity, it's everyone's incentive to try to sell that extra unit and they all lower prices.발음듣기
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So you can have an increased money supply but, if the velocity slows down or if demand is slowing down--발음듣기
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because that's what's causing the velocity to slow down--then you could still have a deflationary situation.발음듣기
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Actually, we touched on the chart where we showed that every major inflationary bout was actually stimulated, or was actually preceded, by a pretty big upturn in capacity utilization.발음듣기
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You could imagine that if, on average, the world is running at 80% that means that some people are running at 70%, some people are running at 90%, 95%.발음듣기
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And those people who are running at 95%, those are the people who say, gee, instead of trying to run at 96%, 97%, 98% utilization,발음듣기
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And obviously their inputs go into other people's; their outputs go into other people's inputs.발음듣기
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We resupplied Israel, and then you had all the OPEC countries that essentially stopped selling oil to the U.S.발음듣기
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And people say, you know, oil prices shot through the roof and that's what drove inflation, that supply shock.발음듣기
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With that said, the question that everyone's wondering about is, what's going to happen now?발음듣기
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So in a normal developed environment, so that you go back into the `60s - and I should probably get the Bloomberg chart on this too, because it's pretty interesting--발음듣기
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But it improves our standard of living and the goal of all countries is really to improve that average standard of living.발음듣기
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In a traditionally responsible, developed nation you save 40%, maybe 30% to 40%, depending on whether you're Japan or whether you're Western Europe.발음듣기
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If you don't save even a little bit, your output will actually decrease, because no one will invest in factories and the factories will get old and the roads will stop being usable and all the rest.발음듣기
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And it's very important to realize that investment and savings are really two sides of the same coin.발음듣기
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But just going back to this example, when people are saving that's what not only maintains output, but actually increases total output.발음듣기
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And then, when we consume 60% of this, we're consuming 60% of a larger number and our standard of living will go up.발음듣기
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What happened, unfortunately, really since the early `80s, is that we had a constant expansion of credit.발음듣기
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We started lending more and more money to everyone and other countries started lending more and more money to us.발음듣기
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When we borrow money from the Chinese, which we use to buy their goods, we're essentially just borrowing their output, right? We're borrowing their goods.발음듣기
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So when we give them a dollar bill, that's a promise that, in the future, they could use that dollar bill to come back and use some of our output.발음듣기
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But over the course of the last several decades, we were just borrowing other people's output.발음듣기
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So when your consumption is actually larger than your output, you immediately start to realize that this isn't a sustainable situation for too long.발음듣기
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And maybe we borrowed a little bit more money and, actually it did turn out that way, that we borrowed some people's output even more to fuel some of our investment as well.발음듣기
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But essentially, the consumption and investment was being financed by other people's output.발음듣기
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And, of course, when you have consumption touching up against - you're fully utilized, that makes it even more an incentive to invest.발음듣기
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What happened now is, you realize that a lot of the financing or a lot of the debt that was being taken on, it was being facilitated by people's homes and home equity loans but people really aren't good for it.발음듣기
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And now all of a sudden, the banks dried up, liquidity is gone, people can't borrow money, and you have a demand shock.발음듣기
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So what you have is a situation where a considerable amount of this consumption, and actually a considerable amount of that investment that was being fueled by financing, disappears.발음듣기
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But now that this demand has disappeared - if this is U.S. output and let's say, this is output that we were taking from China or Japan or wherever else - and our consumption has now fallen down here.발음듣기
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It's because people aren't willing to lend them, to go to Williams-Sonoma and buy a $50 spatula or whatever else.발음듣기
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But, you see, right around summer of 2007 it dropped off of a cliff and it's down here someplace.발음듣기
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So that dynamic that we've been talking about, capacity utilization falling off, because we essentially had a demand shock.발음듣기
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So the question is, everything that the Treasury is doing, and the Fed is printing money, and Obama spending a trillion-dollar stimulus, is that going to lead to inflation?발음듣기
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And, just you know, the stimulus plan, the whole idea about it is, the government doesn't want us to enter into a deflationary spiral.발음듣기
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But if people start having expectations that wages will go down, that prices will go down then, they all go into panic mode and they stop spending.발음듣기
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Let's say they stop spending, then utilization goes down even more, then unemployment goes up even more, and this also makes fear go up even more.발음듣기
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And this is that deflationary cycle that all the economists and all of the government officials are afraid of.발음듣기
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This is post World War I, and the Great Depression actually lasted all the way until - we entered the war in the late `30s - right about here to here.발음듣기
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You had the first wave of the New Deal stimulating some spending, but it really never got us to any significant level of inflation.발음듣기
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Just so you have a sense, I would consider anything above 5% inflation as really, really bad.발음듣기
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So we really didn't get above 5% inflation until you end up with World War I, and then you have the postwar period,발음듣기
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we're under Bretton Woods, and then in the `70s we had, as I talked about before, the oil shock and all of the rest.발음듣기
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But as you see, the deflationary periods are things that government officials want to avoid altogether.발음듣기
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