With the escalation of the Russian-Ukrainian conflict, driven by international geopolitical tensions, inflation is rising in Western countries. In particular, the United States, which is facing the greatest threat of inflation, is caught in the midst of rising prices for commodities such as consumer goods, agricultural products, oil and gas.
 
In the interview with PKU Financial Review, Anne O. Krueger, Senior Research Professor of International Economics at Johns Hopkins University, Former Chief Economist of the World Bank, and Former First Vice President of the International Monetary Fund, states that, Inflation is the result of "more money and less goods": on the one hand, the supply of goods and services in many places is already declining due to COVID-19; on the other hand, the demand for goods has increased. All countries are faced with a dilemma: if monetary and fiscal policies are too tight, inflation will fall, but the growth rate of economic activity will slow down; if they tighten too little, inflation will persist.
 
Is This A Dangerous Age?
 
PKU Financial Review: You have served as chief economist in both IMF and the World Bank. Now the United States and Europe are facing the threat of inflation. Do you think this round of inflation is global and persistent? What do you think of the causes of this inflation?
 
Anne O. Krueger: Inflation is always the result of “too much money chasing too few goods”. “Too much money” means demand, and “too few goods” means supply. The current inflation has been the result of both. The supply of goods (and services) has fallen in many, if not all, places because of the pandemic. The pandemic led to supply shortfalls because workers were sick or could not go to work and because of shipping issues resulting from a shift in demand toward more goods and fewer services as people stayed home, because they were laid off or because they worked from home.
 
Demand fell at the outset of the pandemic as people worked from home and did not want to shop in stores where they might catch COVID-19. The result was that they saved more than they would have without COVID-19. On top of that, many countries followed policies of easy money and fiscal stimulus to offset shortfalls in demand.
 
So, as economies opened up (each time a surge ended and people adapted to COVID-19), consumers wanted to spend again. Shortages arose and demand for many things shot up. Inflation was the predictable result.  It is very likely to persist and in some countries even accelerate this year.  What happens after that depends on monetary and fiscal policy on response to inflation.
   
All countries are in a balancing act: if they tighten monetary and fiscal policy too much, the result will be a reduction in the rate of inflation but a slowdown in the rate of growth of economic activity, if not a downright recession.  If they tighten too little, inflation will persist.  In the US right now, there is a growing view that the Federal Reserve has been too slow to act (not tightening enough) and that fiscal policy is so stimulative that inflation is a real worry.
   
Some analysts believe that supply will grow more rapidly as COVID-19 diminishes its grip and that inflation will slow for that reason. The more widely held view is that how long inflation will last and how high the rate of inflation will be depends on monetary and fiscal policy.
 
PKU Financial Review: Do you think we are living in a dangerous age surrounded with viruses, wars and severe inflation? In what way can it be alleviated?
 
Anne O. Krueger: We are certainly in a dangerous age, but the policies that should be adopted are so many and so different between health, the economy, geopolitics, and other issues, that I cannot possibly answer this question. I do think that too many people in too many countries have forgotten that there is such a thing as a “common good” and overlook the effects their countries’ policies have on the world. The environment is a good example where it is very obvious that there is global concern.
 
PKU Financial Review: Now the U.S. feels that China has not fulfilled its promised purchases in international trade, while China complains that the U.S. has not fulfilled its commitment to lifting the technological blockade against China. How do you assess the relationship between China and the U.S. in international trade in recent years? What changes do you think both parties need to make?
 
Anne O. Krueger: I think it is very sad. Although there are some areas where the US and China have serious disagreements (such as how state enterprises should conduct international trade), trade is an area which should be a win-win scenario. I would hope that negotiations could quickly lead to mutual removal of the tariffs that were imposed by both countries during the “trade war” under President Trump.
   
Meanwhile, I think the US and China should meet through the WTO with all other nations to agree on new rules for new economic activities such as ecommerce and areas with current disagreement. One area which could enable gains for both countries would be to agree on a global accounting standard that would apply to all exporters throughout the world. Individual countries could use their own accounting standards but when they differed, exporters would need to carry two sets of books. There is also scope for agreement on intellectual property standards and treatments internationally.
 
Are New Changes in The New Era is Worthwhile?
 
PKU Financial Review: In this Winter Olympics, China is vigorously promoting digital RMB. What do you think of the fact that some central banks have entered the field of digital currency? Also, which do you think is the preferred attitude of central banks towards private crypto currencies? Should it be banned like China, or managed with a 30% transaction fee like India, or should it be strongly encouraged like Japan?
 
Anne O. Krueger: I think we are in early days of digital currencies. It seems likely that there will be central bank digital currencies (CBDCs) in most countries before too long. A major issue for all countries is what, with CBDCs, the relationships between central banks and private banks would be.  The historical evidence seems to be that private banks are better able to evaluate risks than are public entities.  There are also many technical questions that need to be addressed.
 
PKU Financial Review: Your paper "The Political Economy of the Rent-Seeking Society" is considered as the most classic paper on rent-seeking theory. Many people now promote this concept to the emerging Internet industry, because Internet giants have a large number of platform monopolies, traffic control, while using capital to acquire competitors and buy new tracks. Do you think that this kind of behaviors coming from non-administrative power is also a form of "rent-seeking"?
 
Anne O. Krueger: To date, the internet industry has been developing and there are “network economies” (meaning that a company needs to have a very long list of customers, because they want to relate to many others), it is difficult for a new entrant to break into the industry). But there are a number of large firms (and to be an effective “network”, they must have many users) and there have been and are new entrants. There is still rapid technical progress. I think it is too soon to evaluate the degree of monopoly power in the industry, and that there is a strong risk that we would discourage innovation if there is too much regulation while the industry is still rapidly evolving.



Anne O. Krueger

Senior Research Professor of International Economics at Johns Hopkins University
Former Chief Economist of the World Bank
Former First Vice President of the International Monetary Fund

 * This article has been translated and published in PKU Financial Review.