Capacity Utilization, Money Supply And CPI

The FED's release on October 28th about Capacity Utilization showed a rise from 77.9% to 78.3%. So what?

Well, in past years, a rise in Capacity Utilization has indicated that price pressures are building. The higher that C.U. goes, the less slack there is in the Economy, as measured by existing industrial plant and equipment.



Each year, some of that Capacity wears out, and some becomes obsolete as better methods and tools are developed. Each year, some Capacity is added. During good economic years, more Capacity is added than becomes useless, while during an economic slump, our country's capital stock may decline.

Generally speaking, if investment provides a net growth of plant and equipment, there is a greater ability of our Economy to produce the things that all Americans want to use, and as a country, we grow richer. A net decline (or stagnation as population rises) means that we all are getting poorer.

If times are bad, consumers (including businesses as consumers) Demand less, businesses sell less and make lower profits, and need to use less of their existing Capacity. Pricing power evaporates so prices either fall or just don't rise. In this kind of environment, spending to increase (or maintain) Capacity falls, and we all get poorer.

Most of the last 13 years have been such a time. As shown by John Williams on his wonderful site www.shadowstats.com, except for a few months, the US Economy has been in Recession since 2000. So net investment, to grow and maintain Capacity, has been negative.

Ordinarily, a reduction in plant and equipment will reduce Capacity over time so that eventually, the Utilization of the remaining Capacity rises, allowing for greater pricing power (so prices rise), profits go up, and businesses once again begin to expand their net investment.

The key word is “ordinarily.” During the Bush years, but especially during the last 5 years under Obama, the federal government has been hostile to the US Economy! The socialists leading both parties have grown the portion of the Economy that they demand as tribute. They spend more, they tax more, they regulate more, and they display more of the corruption which is called crony capitalism. (Yes, I know it's a contradiction in terms.)

They have run up massive deficits, year after year, even as they throw up their hands and say, “There's no place left to cut.” They have accumulated a National Debt that staggers the imagination. They encourage the FED to manipulate interest rates down and to buy Treasuries that nobody else wants using Monopoly money. (Why would you encourage the FED to increase its criminal activity?)

The FED's Monetary Base, the basis upon which all the other Money Supply statistics rest, has zoomed to 4 times what it was just a few years ago. Broader Money Supply measures are on the rise again. More money in circulation means more paper chasing the goods and services being produced, so in nominal terms, prices rise. For a truer picture of what the CPI numbers SHOULD look like, see www.shadowstats.com. (If you believe the BLS figures, I have a bridge I'd like to sell you.)



So, a really low net investment causes a low Capacity Utilization, which encourages increased net investment as prices start to rise. And, Money Supply increases also translate into higher prices as all the newly printed funny money sloshes around (a technical term) and bids the prices up. Of course, price rises do tend to lag hikes in Capacity Utilization and Money Supply.

It is safe to say that we should expect the “official” CPI to start going up noticeably by next Spring. As the CPI goes up, and as GDP growth stagnates, the "Pain Gauge" should go up, just in time for the Mid-Term Election season. I can only hope that many in the current crop of crooks and fools, in both parties, will get the axe.