Wait a second, you say. Why cannot our wonderfully flexible market economies roll with the punches? Won't high prices cause people to conserve on consumption and seek out new sources of supply?

Yes, and that eventually happened with energy supplies in the 1980s. But the process takes time, and, because of the rising weight of relatively inflexible emerging market economies in global consumption, adjustment will probably take longer than it did a few decades ago.

Rich country consumers are responding to higher energy prices, and it helps. New York City, for example, has seen a reduction of perhaps 5 percent in private vehicles entering the city over the past six months. Gridlock has abated, and you can almost get around the city by car these days.

But the response is slower elsewhere. It certainly is not getting any easier to drive around in places like Sao Paulo, Dubai, and Shanghai. For a variety of reasons, mostly related to government intervention, few emerging market economies can be categorized as having flexible resource demand, so commodity price spikes are not having a particularly big effect on demand.

The central bankers who tell us not to worry about inflation point to relative wage stability. Expansions usually start collapsing when labor gets too scarce and too expensive. But the current expansion is unusual in that, due to unique circumstances, labor constraints are not the problem. On the contrary, the effective global labor force keeps swelling.

No, this time, commodity resources are the primary constraint, rather than a secondary problem, as in the past. That is why commodity prices will just keep soaring until world growth slows down long enough for new supply and new conservation options to catch up with demand.

This runaway-train global economy has all the hallmarks of a giant crisis in the making - financial, political, and economic. Will policymakers find a way to achieve the necessary international coordination? Getting the diagnosis right is the place to start. The world as a whole needs tighter monetary and fiscal policy. It is time to put the brakes on this runaway train before it is too late.

Kenneth Rogoff is professor of economics and public policy at Harvard University, and was formerly chief economist at the IMF Project Syndicate

(China Daily July 4, 2008)