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April 23, 2008

Dr. Maule revisits his unhappy forecasts for shortages of, well, everything but shortages.

Turning from something that I don't buy to nutrition that really matters, it's only a matter of time before an extremely serious shortage sets in. What does one do when the headline reads, World chocolate shortage ahead? That's news from a year ago. Chocolate prices have been increasing. Several months ago, Hershey's announced an increase of 13 percent. The law of supply-and-demand is making itself known in every corner of the economy.

20080423-1.pngI yield to no man in my concern for the security of the nation's strategic chocolate reserve. Yet Dr. Maule has correctly, if perhaps unintentionally, identified our salvation: the law of supply and demand. If demand pushes up the price of chocolate, demand will slacken or (my preference) supply will increase as opportunistic vendors gear up to meet the demand.

But what if prices in everything increase? An increase in the general price level, or general inflation, "is always and everywhere a monetary phenomenon," as a wise man once said. The solution is independent of the world commodity markets. The Fed just needs to stop flooding the economy with easy and cheap credit to bail out foolish home lenders and borrowers.

The only thing that frightens me about the future availability of commodities is the idea that shortages can be solved, as Dr. Maule says, "...if people and governments mobilize to deal with these issues while there still is time."

Whenever you can find shortages, it's almost always because government got there first. Steel shortages? Look to tariffs to "protect" the steel industry. Food shortages? The government is paying enormous amounts for us to burn food in our cars, and government intervention, primarily overseas, blocks the enormous potential of genetic modification to increase the food supply and save lives. Fuel shortages? It's the government that keeps us from tapping enormous fuel supplies on our doorstep off the Florida coast and in the arctic wastelands, for starters, and it's government regulations on what fuel can be burned where that causes the worst price spikes. Not to mention the government hassles that have kept any new oil refineries or nuclear plants from going online in recent decades. It's arguable that those are correct policies anyway, but there's no arguing that they impair the energy supply.

I suspect Tyler Cowen may have it right when he says:

I give the current price trend another ten or fifteen years or so to run. Eventually high commodity prices will seem permanent and then the bottom will drop out.

But if the government mobilizes to solve the problem, Dr. Maule's long-term pessimism could well be justified.

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