The global economy is supply-constrained in industries from mining to lumber to oil refining, largely because companies haven't invested enough in production capacity over the last few decades. There's no puzzle or global plot here, just economics. The profits in many of these industries were so low that nobody invested in new production capacity.
The good news is that this cycle will turn, as such cycles do, as current high profits, created by this very lack of supply, are invested in new capacity. Eventually supply will catch up -- as long as the profits are there, it always does. (Unless the world is indeed facing a growing shortage of discoverable and recoverable oil, and the jury is still out on that one.) And if this cycle is like most, companies will overinvest, lured by current and temporary high profit margins, setting the stage for a period in many of these industries when supply again exceeds demand.
The bad news, however, is that building new capacity to produce the basic materials in such short supply can't be done overnight. We're talking about developing iron and copper mines (after exploration companies have discovered the new deposits). About drilling for oil in deeper and deeper water -- or in politically more and more unstable countries. About building new refineries and smelters to turn raw materials into consumable goods. And about constructing docks and pipelines to get these materials to markets. And then there are the really long-term projects -- like liquefied natural-gas terminals -- that will take decades to build, if they get built at all.
But there's a major source of inflationary expectations that isn't under the Federal Reserve's control. That source: the White House and the Congress.
The sheer size of the annual budget deficit -- no matter whose accounting you use -- is damaging enough to any effort to prevent inflationary expectations from becoming embedded in the economy. As one spending plan gets piled on top of another, more and more people find it easier and easier to believe that the conscious plan in Washington is spend and spend, and then inflate and inflate, to make it easier to pay down the huge debt that's been built up.
Watching our government at work, it's hard to believe that money, especially the U.S. dollar, has any value at all. Certainly the politicians don't behave as if it did. If money has value, how do you justify the recently passed transportation bill, filed with more than $30 billion in vanity projects designed to get politicians re-elected -- and the recent refusal by House Majority Leader Tom DeLay, R-Texas, to even consider giving back a dollar from that bill to pay for Hurricane Katrina?