Deutsche Bank: US Deficits Won't Shrink as Tech Sector Lures Global Capital

Deutsche Bank has published a report that applies a 19th-century economic theory to modern US fiscal dynamics. The report, titled 'US deficits: A new twist on Wicksell,' uses Knut Wicksell's ideas about interest rates and economic instability to explain why the US economy's deficit won't shrink anytime soon.

Wicksell proposed that economic trouble brews when the interest rate set by central banks drifts away from the 'natural rate,' which is basically the return investors can earn by putting money to work in the real economy. Deutsche Bank applies this framework to modern US fiscal dynamics, arguing that the natural rate, boosted by tech-sector dominance and sustained productivity improvements, sits well above the rates the Fed sets and the yields investors can get from bonds or deposits.

The result is a self-reinforcing cycle: capital flows in because US returns on equity are elevated. Those inflows strengthen the dollar, making it harder to close trade deficits, which persists because the economy keeps humming along on imported capital, reducing the political urgency to cut spending.