Deutsche Bank Issues Stark US Inflation Warning, Seeing Economic Parallels to 1940s, 1970s

Deutsche Bank, Germany’s largest lender, says the U.S. might be headed for one of its worst inflationary periods in history, arguing that elevated government spending and loose monetary policy could combine to create conditions similar to prior episodes in the 1940s and 1970s…

Adding to the pressures are some $2 trillion of “excess savings” that consumers have amassed over the past year, when many businesses were closed and travel mostly shut down, according to the report published Monday.

“Consumers will surely spend at least some of their savings as economies reopen,” wrote Deutsche Bank Chief Economist David Folkerts-Landau along with Peter Hooper, global head of economic research, and Jim Reid, head of thematic research.. “This raises the very real specter of consumer-driven inflation.”

Inflation is closely watched by cryptocurrency investors who view bitcoin as a hedge against dollar debasement.

But bitcoin has also traded at times in sync with risky traditional assets like stocks, and the Deutsche Bank authors warned that when inflation does eventually appear, the Fed might have to react forcefully, which could “create a significant recession and set off a chain of financial distress around the world.”

The warning comes in marked contrast to Federal Reserve Chair Jerome Powell’s repeated assurances that elevated inflation readings are probably “transitory,” and will settle back over time as the economy recovers from last year’s pandemic-induced recession.

“A lack of preparation for the return of inflation is concerning. Even if some inflation today is transitory, it may feed into expectations as in the 1970s,” according to the report. “Even if only embedded for a few months, these expectations may be difficult to contain with stimulus so great.”

  • One signal to watch is the output gap, which measures the imbalance between demand and supply, expressed as a percentage of an economy’s gross domestic product.
  • Deutsche Bank expects the U.S. output gap to rise above 2%, the highest in over two decades as demand exceeds supply, resulting in higher prices.
  • After the financial crisis of 2008, the “quantity of U.S. stimulus was insufficient to close the output gap, and the recovery was needlessly slow.”
  • But an elevated output gap during the 1960s preceded the high inflation of the 1970s, which was exacerbated by a series of oil-price shocks.

Deutsche Bank estimates that legislated stimulus packages have totaled in excess of $5 trillion, or more than 25% of gross domestic product. The U.S. federal deficit is likely to come in at…

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