Debt and inflation become the biggest constraints! Deutsche Bank warns: The global market "policy safety net" is failing and future volatility may intensify

According to Golden Ten Data, Deutsche Bank Research has stated in a recent report that the era of large-scale policy interventions used for decades to cushion global market economic shocks is coming to an end. Rising sovereign debt, high interest rates, and persistent inflation are weakening the traditional "safety net" provided by governments and central banks.

Deutsche Bank analyst Henry Allen pointed out that, compared to past crises, policymakers are now facing unprecedented constraints. He warned that the interventionist policy tools used by governments and central banks during the 2008 global financial crisis and the COVID-19 pandemic may no longer be sustainable.

Henry Allen emphasized that higher baseline debt-to-GDP ratios and increasing interest burdens have already limited policymakers' ability to significantly expand fiscal deficits or launch large-scale quantitative easing programs during future economic downturns. This is because such measures today carry the risk of reigniting spiraling inflation, which has only recently been partially controlled. With government balance sheets under pressure and borrowing costs remaining high, the fiscal firepower that was relied on during past crises has been significantly diminished.

Henry Allen believes that unless yields drop sharply or inflation collapses, markets should prepare for higher macroeconomic volatility, higher term premiums, and reduced reliance on rapid government bailouts. Over the past 20 years, the so-called "monetary policy put" has provided support for risk assets, but future dependence on this policy backstop mechanism by markets may weaken. He emphasized that the "safety net" the market has grown accustomed to is gradually breaking, and the global economy may soon have to deal with turmoil without the buffer of large-scale policy interventions.

Henry Allen stated: "If we look back over the past 40 years, we find that the last five U.S. economic expansions all rank among the seven longest expansions since the start of the business cycle statistics. There are several reasons for this, including a shift from an agriculture-based economic model dependent on factors like weather. But preventive policy interventions have also played a key role, such as cutting interest rates to prevent economic slowdowns from turning into recessions."

Henry Allen added: "In addition to actual policy interventions, these measures also produce a confidence effect, thereby supporting financial markets. The fact that policymakers are always ready to act helps create a virtuous cycle, as optimism about the economic outlook boosts the value of financial assets, creates a wealth effect, and prevents financial conditions from tightening—a tightening which itself could lead to slower economic growth."