Deutsche Bank: The Government And The Fed Have To Take On More Debt Because No One Else Will

While Richard Koo of Nomura has been calling this recession a balance sheet problem for quite sometime, Deutsche Bank have jumped on that theme noting it as the key cause for the increase in debt on government and central bank balance sheets.

From Deutsche Bank:

Fed Balance Sheet Double

They are concerned, however, that this is going to create an inflation problem in the medium term.

From Deutsche Bank, emphasis ours:

As long as the banking sector’s ability to create credit remains impaired, the extension of central banks’ balance sheets remains benign: it provides liquidity to the government and counters recessionary forces without stoking inflation. However, we expect inflation risks to rise when money and credit multipliers return to normal and central banks face difficulties reducing their balance sheets. This is not around the corner but seems fairly likely in the medium-term, in our view.

And, clearly, the banking sector is still in a horrific state when it comes to credit creation. Likely the fault of its own pre-financial crisis weak balance sheets and concerns over the alteration in risk and reserve requirements.

From Deutsche Bank:

Private Sector Credit

It is therefore the size of public debt that is the likely cause of inflation, according to Deutsche Bank, and the U.S. and UK seem the most likely to experience that rise, according to their historical assessment.

Check out Richard Koo’s awesome presentation on balance sheet recessions >

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