Deutsche Bank Warns: The Age of Scarcity, Inflation and High Rates Has Begun

The Deutsche Bank study summarized by Juan Ramon Rallo opens with a single sentence: we are entering a new era defined by scarcity and inflation . After the pandemic the economy has suffered a structural break; the problem is no longer that nobody spends enough, but that supply cannot keep up . When production is bottlenecked, pumping demand with monetary and fiscal stimulus does not raise output, it lifts prices and interest rates directly. If policymakers keep the old playbook, the return of inflation to target will be delayed and rates will stay on a high plateau compared with the previous decade. The report sharpens the debate by arguing that government intervention is not the remedy for this picture but part of its source: regulation and large deficits sit inside the mechanism that pushes prices up.

From 2008 to 2019: When Demand Fell Short

Understanding that regime flip requires recalling the post-2008 world. Unemployment stayed elevated for years, the United States did not return to pre-crisis levels until 2017 and the euro area until February 2020. Economists called it secular stagnation ; excess savings, weak appetite for investment and very low rates were parts of the same equation. So abundant was the glut that sovereign debt was sold at negative yields — investors paid governments to lend. That plenty made large fiscal deficits look free : the state could borrow heavily without lifting rates or inflation because the private sector did not know what to do with its savings. In Rallo's telling this era works as a contrast: then money was cheap and output was elastic, today it is not.

The pandemic broke that contrast. While governments shut social interaction and shrunk production , they also expanded deficits at a pace never seen in peacetime. The result was textbook: a lot of money chasing few goods, a price wave that started in 2021 and peaked in 2022. The expectation was that once the wave passed the economy would return to the low-inflation, ample-liquidity world of the 2010s. It did not. Since 2022 inflation has remained stubbornly above target and policy rates have stayed high. Rallo argues this is not a lingering lag but a regime change: deficits that remain elevated even in peace, plus supply shocks that keep returning in different forms.

Three Wars, Three Supply Breaks

The report makes the regime tangible with three breaks. First, Russia's invasion of Ukraine in February 2022 made European gas expensive, forced industry to decouple quickly from Russian supply and, with Black Sea ports blocked, lifted global wheat and corn prices. The second wave came from trade policy: the average effective tariff in the United States jumped from 2.6% to 23% in April 2025 before settling near 11%, rendering many supply chains unprofitable and pushing them toward costlier, less efficient routes. The third and, in the bank's narrative, sharpest shock in 2026 was the closure of the Strait of Hormuz ; a choke point in a narrow strait lifted oil, freight costs and inflation expectations at once. The common message across the three episodes is simple: making and moving things has become expensive and fragile again.

A second demand-side pressure is quieter but powerful: the surge in artificial intelligence investment . Chip fabrication, memory, power generation and, crucially, funding are all stretched at once; the mega-projects of hyperscalers are largely debt-financed and absorb a large share of the credit pool. In such a world, if governments try to suppress rates artificially or enlarge deficits further, the economy cannot activate additional output; every extra unit of demand returns as higher prices and higher rates . Rallo's illustration is telling: refineries cannot produce more diesel overnight, oil does not flow if Hormuz is closed, chip fabs do not add capacity overnight; at that point fresh money is written onto the price tag, not onto the goods. The bank therefore stresses that monetary policy is weak against supply-driven jumps, and fiscal expansion in this context raises both inflation and the risk of crowding out private investment.

The 1970s Mirror: Three Lessons

The longest section of the presentation is the mirror held up to the 1970s. In 1973 an oil embargo nearly quadrupled the crude price and triggered a global recession; six years later political upheaval delivered a second energy shock. The lesson drawn is that a single shock can be treated as transitory, but repeated shocks change public perception. Once people stop viewing each jump as temporary, expectations de-anchor , wages chase prices and prices chase wages in a spiral where money loses value across the board.

Two further lessons focus on policy mistakes. After the first shock the Fed stayed too loose in an era when Bretton Woods discipline had loosened and monetary restraint had weakened, laying the ground for de-anchored expectations; after the second shock in 1979 the Fed chair at the time, Paul Volcker, had to raise rates sharply to restore the credibility of money and re-anchor expectations. On the fiscal side the pattern was similar: spending that looked costless when demand was short became inflationary and displacing when supply was tight. Governments that spent as if no budget constraint existed in the 1970s ended up with more inflation without more growth. The distilled takeaway for today is clear: trying to offset a negative supply shock with a positive demand shock through monetary and fiscal stimulus does not work; the correct response is to contain demand and widen the productive frontier.

Solution: From Managing Demand to Expanding Supply

That is why Deutsche Bank frames its recommendation as a Copernican turn . For fifteen years the debate has been "how much should we spend and print." The relevant question now should be "which barriers should we remove so we can produce more." The report's list is concrete: more energy , more housing, broader labor participation, vocational training, automation, port and grid capacity, access to raw materials and more resilient trade networks. None of these is an announcement that delivers the next morning; they take years and carry little political glamour. Yet the bank argues they are the only durable way out of the scarcity and inflation loop, alongside fiscal and monetary discipline, with expanding supply at the centre.

The subtle link between supply and demand is the binding thread. In a world of high deficits the public sector absorbs scarce funds, labor and inputs, pushing private investment out ; a new plant, a new software stack or a new network is shelved because the cost of funding has been lifted by sovereign borrowing. Rallo's emphasis on Europe is sharp here: on one side regulation slows investment, on the other deficits make financing expensive and drain capital from sectors such as artificial intelligence that could lift productivity. When public resources flow into transfers that feed clientelist networks rather than productive capacity, the opportunity is wasted. What the bank is really saying is that every budget choice is also a supply choice ; if spending does not raise potential output, it raises the price level.

The video closes by restating the tension between economics and politics. Economics is presented as the effort to coordinate people around scarce resources to create positive-sum wealth; politics is portrayed as the craft of producing legitimacy while extracting from citizens in a zero-sum game. That tension explains why economic policy often looks contradictory: one aims to enrich, the other to reallocate and collect votes. In Rallo's synthesis the call is plain: in the world and especially in Europe, less politics, more economics . It is not a slogan for a smaller state, but a call for a patient strategy that focuses on multiplying what is scarce. Inflation and high rates are not fate, it concludes, they are the outcome of whether we choose to expand supply.