Deutsche Bank: Fed’s Inflation Could ‘Create a Significant Recession’

Coming out of the COVID-19 pandemic, the economic outlook is mainly positive. With small businesses revitalizing and life returning to semi-normal, it is easy to forget about the powerful expansionary policy adopted by the US government to get through the crisis. These strong steps to stimulate society will leave scars on the economy that will be faced for years to come. While the Fed will work to mitigate the impacts and return to steady growth, the recovery will be truly unprecedented. 

Despite the majority of economists and policymakers neglecting rising inflation rates, in a Deutsche Bank report, economists warn that high inflation could push the Fed into uncharted waters. Further exemplifying inflation, consumer products have recently seen an increase in price. With fiat losing value, Bitcoin could act as an investor’s safe-haven from alarming inflation and uncertain economic recovery. Below shows the quickly growing US inflation rate:

The Fed Claims High Inflation is Transitory

To fight the pandemic, the US has spent over $5 trillion on stimulus packages, in addition to making nearly $8 trillion worth of purchases amounting to over 60% of GDP. These decisions have been important to minimize the crash of the markets and pull the economy out of the recent recession, but now may leave the US relying on unsustainable supports. 

Supporting their strategy, the Fed has consistently reiterated their position that the high inflation rate is transitory, and will pass without the need for interjection. Following this, the Fed is not yet ready to tighten policy, but is optimistic about the recent recovery.

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Now, the Consumer Price Index is increasing quickly, as prices have seen the highest yearly increase since 2008. This can be seen in everyday life with gas and used car prices increasing 49.6% and 21% respectively over the past year.

Deutsche Bank Economists Concerned by Rising Inflation

Deutsche Bank Chief Economist, David Folkerts-Landa believes that the Fed does not realize how dangerous current and potential high inflation really is. According to the aforementioned report, the increase in central bank debt is likely to lead to higher inflation, further exacerbating the issue. The authors of the report write,

“…this could create a significant recession and set off a chain of financial distress around the world, particularly in emerging markets.”

In addition, the divergence of monetary supply and nominal GDP could be an indicator of rising inflation and troubles to come. 

The content of the Deutsche Bank projection establishes concern over the current and outlook for inflation in the US. To cement his position and stimulate discussion, Folkerts-Landa concludes his forecast:  

“Low, stable inflation and historically low interest rates have been the glue that have held together macro policy for the last three decades. If, as we expect, this starts to unravel over the next year or two, then policymakers will face the most challenging years since the Volcker/Reagan period in the 1980s.”

Bitcoin vs. Inflation

Gold has been a well known hedge against inflation, but to investors there are many obvious downsides of holding gold (physical space, easily stolen, etc.). Throughout Bitcoin’s short history, it has already fought many battles against inflation and the greater financial system. It’s first showcase was the Cypriot banking crisis in 2013, when citizens rushed to convert Euros to bitcoin, as the government worked to seize funds. Then, more recently, hyperinflation in Venezuela pushed the people to convert their funds to the digital asset. While these two examples are extreme, they display a major use case for Bitcoin.

Bitcoin price is known to rise during times of uncertainty, further displaying its prominent role as a safe-haven from the downsides of fiat currencies. With so many unknowns for the future stability of the US Dollar, crypto as a whole will be important. As current inflation continues to rise, Bitcoin could be exactly what investors are looking for. 

The world has taken a major economic blow from the pandemic. Future inflation will be indubitably unknown. Will Bitcoin be the hedge against fiat inflation investors need? Let us know what you think in the comments.