Inflation, deflation, and capacity utilization발음듣기
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Inflation, deflation, and capacity utilization
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출처 : 칸아카데미
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With all the talk of the deficits that we're entering, and the stimulus bill, and all the money that's being spent on the bank bailouts, and potentially the auto bailouts, the question that everyone's asking: Is this going to lead to inflation?발음듣기
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So they actually measure it by - they take a basket of goods and services and they see how those prices compare to a reference year.발음듣기
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If one year 10 megabytes of RAM costs x dollars, and then the next year, it costs a little bit less, it's actually a deflationary process, at least in that market.발음듣기
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So without the those definitions out of the way, let's talk a little bit about what causes it.발음듣기
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A couple of days ago, I made these videos on cupcake economics, where I talked about what happens when the cupcake factories have high utilization or low utilization.발음듣기
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And the reason why I did that is because I really want to make it very clear that it really is utilization of factories or of people that drive prices.발음듣기
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We could just talk about labor capacity, and then unemployment rate is a measure of what is essentially not being utilized.발음듣기
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And in those cupcake economics videos, I showed that if the demand is pushing up against capacity. let me do demand in a different color.발음듣기
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If demand is really close to capacity - and I know everything I draw kind of looks like balance sheets, but this isn't intended to be a balance sheet.발음듣기
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instead of trying to just try to sell that extra unit - this is demand - instead of just trying to sell that extra unit and have to worry about all the raw materials and have to work for that extra unit,발음듣기
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And this isn't some kind of fancy macroeconomic principal; it's true if you're running a lemonade stand.발음듣기
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If all of a sudden, you're starting to sell 95% of your lemonade, you'll probably say, hey, maybe it's worth it if I raise the price.발음듣기
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On the other hand, low utilization - let me pick another color --will lead the prices dropping.발음듣기
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And you go back to your lemonade stand, and you say, wow, if I'm only selling 20% of the lemonade that I make, maybe my problem is that my lemonade's too expensive.발음듣기
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And frankly, if there was a bunch of lemonade stands, everyone is trying to sell their capacity.발음듣기
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Actually, I'll throw another thing in here that's a little unrelated to inflation, but high utilization makes prices go up and it also makes people want to add more capacity, right?발음듣기
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So if you accept that - and I think it's a reasonable argument, because it's really based on common sense things --then I think you'll buy the argument that, if you have very low utilization, it's difficult to have inflation.발음듣기
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And to kind of hit the point home, actually, I took our company's Bloomberg terminal and copied and pasted these charts here.발음듣기
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And the orange - and I know you can't see it that well on YouTube , so I'll try to make it clear in my drawing,발음듣기
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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.발음듣기
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This is 1969, actually December 31, 1969, so this is 1970, beginning of 1970, this is beginning of 1980, beginning of 1990, this is 2000.발음듣기
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Arguably because of the Vietnam War, we had factories running at capacity to build bombs and Agent Orange and God knows what else.발음듣기
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We could talk a lot about the history, but, in general, the interesting thing - well, actually, before I go into what happened, let's think about what this white line is.발음듣기
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Very recently, this was like 2007, we had 80%, and very recently, utilization has dropped off, which essentially just means we're not running our factories at full tilt.발음듣기
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And you see, in the time series that I've done, we've never had zero inflation, although we have had periods of a very high inflation.발음듣기
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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.발음듣기
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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.발음듣기
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OK, when inflation really started turning around, we were at a capacity utilization of roughly 83%, 84% right there.발음듣기
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And then, if you look at the next period where inflation really started to hit - you can either pick that point or that point --where was capacity utilization?발음듣기
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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.발음듣기
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So this white line here, you don't see it because the orange line - actually, I realize that I'm showing you off the screen.발음듣기
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And you don't see it there because it's overwritten, but the inflation line has also dropped considerably.발음듣기
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But notice once again, although here it's pretty close, but utilization dropped off a couple of quarters before inflation dropped off.발음듣기
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And that's why I always wonder why the Federal Reserve Board of Governors, they always talk about different inflation indicators and what to do about interest rates, when you do have a pretty good indicator, and that's capacity utilization.발음듣기
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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?발음듣기
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Normally, if you increase the money supply, if the money supply goes up, that should increase demand.발음듣기
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But there's a subtle, and it's almost a philosophical point, but it's an important one, to realize: Money just allows you to express demand.발음듣기
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If someone gave me $200,000 into my pocket, then I could express that demand to buy the Rolls Royce.발음듣기
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I have money to express the demand, but I won't do it, because I don't think it's necessary.발음듣기
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So you can make that same analogy in the economy as a whole, where you can imagine an island where, let's say, there's five of us or three of us, because I don't want to draw five people.발음듣기
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You can see that one seashell, even though my money supply on that island is one seashell, it can transact many times in that year.발음듣기
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I don't want to give him my seashell, because I'm not sure if I'm going to get that seashell back again to do something else.발음듣기
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So you can imagine a reality where the central bank of our island, all of a sudden, they find hundreds of seashells.발음듣기
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But all of us have lost so much confidence in the economy, or are so unsure over whether other people are going to use my goods and services, that I don't want to use their goods and services.발음듣기
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So this is a situation where the money supply could actually increase pretty substantially, but since no one wants to express it through demand, it's not going to increase utilization.발음듣기
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And so in the situation that we're in right now, if you're wondering about whether you're going to see inflation or deflation, my argument is look at capacity utilization.발음듣기
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The money supply times the velocity of money - that's how often the actual dollars switch hands - is equal to the price of the average price of goods times the total quantity of goods and services we have.발음듣기
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But we're saying that whenever you have major shocks and people lose confidence, this velocity can slow down considerably, especially when things like financial intermediaries start hoarding money and people start putting money into their mattresses.발음듣기
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