Desperately trying to cure their financial ailments, central banks in the West fired up their money-printing machines to pour liquidity into their respective banking systems. While this no doubt helped thaw the credit freeze, it also inadvertently sowed the seeds of inflation. Andy Xie, a renowned independent Shanghai-based economist and former Morgan Stanley chief economist for Asia, discussed this issue in a recent interview with the Securities Times. Edited excerpts follow:

For economists around the globe, the arrival of the new year means more despair and less cheer. Though the ripple effect of 2008's Wall Street chaos has been losing traction, inflationary pressures have come roaring back.

Desperately trying to cure their financial ailments, central banks in the West fired up their money-printing machines to pour liquidity into their respective banking systems. While this no doubt helped thaw the credit freeze, it also inadvertently sowed the seeds of inflation.

Signs of serious inflation are expected to become more visible this year, a trend that will force policymakers to raise interest rates and phase out their heavy stimulus plans. For global economies that have yet to recover, a reduction in government aid will prove to be a deadly blow. Meanwhile, inflation will continue to grow worse until 2012, since there is usually a time lag before monetary constriction filters through the real economy.

Even for China, the danger was no less acute. Excess liquidity has spilled into capital markets and is causing serious asset bubbles to form across the country. As their profits wither due to rising costs of labor and materials, an increasing number of enterprises are losing interest in production and turning their eyes to the real estate market for speculation. This will end up adding fuel to the property euphoria fire.

This sort of bubble could easily burst if there isn't enough liquidity to continue feeding the financial frenzy. For example, if the Unites States raises its interest rate to 4 percent to calm down inflationary jitters in 2012, China would surely follow suit in the event of a massive outflow of capital. This is when a painful real estate crunch will occur.

This is not the first time we have experienced inflation on a worldwide scale, but never before has the risk escalated to such an extent that it has been able to jeopardize the health of the global economy. In the past decade, China was a major deflationary force, providing the world with numerous cheap consumer products. But that protection has obviously diminished as the country sees a shortfall of labor and increases in the prices of land.

Globally, inflation may cause a 10-year delay in the world economy's ability to restart its growth engine. The current crisis' origin lies in the developed world's bailout policies that paid billions of dollars to correct the mistakes made by speculative financial institutions.

A more viable solution should have been to nationalize the beleaguered financial institutions and extend substantial support to employment and social welfare. In addition, more vigorous efforts are also needed to restructure economic systems and lay a solid foundation for future growth.