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?

So 5 million of liabilities.

But his return on asset has gone down to 20. and, because he's at that utilization, his return on asset has gone down to 20 .

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

You'll hear people talking in terms of 10 1 or 2 1, or something to one, but 10 3 is a fair leverage ratio.

So, as long as we have a pretty high utilization and people debate on what is the level of utilization in lot of industries where it makes sense to raise prices.

Japanese automakers are investing heavily in new plant and equipment.

The company's capital expenditure program is set to be 10 billion yen for this year.

So there's no net investment.

The next question that everyone has is, OK fine, Sal.

We have motion sensors, alarm systems, armed guards.

Corporate profits are quite high in fact, if you include bank profits, they're higher than they've ever been.

The amount of money you get.

So those are the two side effects of high utilization.

Proportion

Proportional Bias

Ratio

If you divide both of these numbers by 5, you get 5 to 3.

Our advice is that the company invest in new equipment.

So what happens if I raise my price a little bit?

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.

Because most of you compared the price of this Big Mac to the price you're used to paying.

They just can't get another credit card loan or a home equity loan.

So if anything, you could say that demand was maybe right around here.

And then Vikram is selling 400.

More money's coming to the bottom line.

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

Could lead to more innovation.

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,

And just when this Imran comes in, and he enters into the space, all of a sudden, what is the return?

Well, that means the ratio of the assets to the equity is 2 1.

High utilization will allow you to raise prices and when you raise price you'll get a better return on your asset, and then the other side effect is, when you have that high return on asset, you'll also have more investment going on to build more capacity.

So I think we all agree that if I were to build a factory that this is let's say I'll do everything in green as investment.

The price of money will go down, that's what the federal funds rate is, it's the target rate, so I'll say Fed Funds Rate, it's the target rate that the Fed sets for the overnight borrowing of reserves between banks, that's the Federal Funds Rate, and it will go down and that's how the Fed tries to set the Federal Funds Rate.

It comes down to here. But notice once again, although here it's pretty close, but utilization dropped off a couple of quarters before inflation dropped off.

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

Golden ratio

Investment

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.

Malibu Equity and Investments.

Well their intention was to take these home equity loans and put that money to work, invest it in some way.

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 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.

Now, fast forward to a situation like we are right now and the Federal Funds Rate is already at zero.

Test the ratios for equivalence and determine whether the relationship is proportional.