The only way to fix the economy might be for the stock market to 'collapse

The USeconomy and financial system is a mess of contradictions right now.Bond yields are hitting record lows while the stock market is hitting record highs. The labor marketis signaling full employment, but GDP growth remains lackluster.According to thefixed income research team at Deutsche Bank, there is a way for these conundrums to work themselves out, but it will take some pain for us to get there.Specifically, stock market crash pain.Essentially, Deutsche's fixed income research team argues that many of the issues facing the financial system come fromcentral banks using interest rate cuts, asset purchases, and other monetary policy measures to spur economic growth.The team thinks this has reached its limits and that we have entered a period of "financial repression," in which rates are kept low and economic growth is limited.In order to deal with this, the Deutsche team said thatmore aggressive fiscal policy, includingserious government spendingto build infrastructure, hire people, and grow the economy, is needed.Now this isn't a new idea. Everyone from hedge fund titans to both leading Presidential candidates have mentioned the need for government investment to kick-start economic growth. The issue almost everyone has cited is legislative pushback and attitudes towards taking on more debt.The Deutsche team agreedthatstimulus is unlikely given the current political landscape."It is still too early to call the US election and stimulus prospects here but the general sense is that it is still difficult to sense the urgency when equities make new highs," said the note."Policymakers arent used to dealing with financial repression and that unfortunately is one of the defining characteristics of stagnation."The only way to get the political will to grab onto this solution, in the opinion of the Deutsche Bank team, is for something drastic to happen: a stock market sell-off. Here's the Deutsche team (emphasis ours):"The conclusion is that without an external economic shock it is hard to see policymakers being prepared to take dramatic, fiscal action to jumpstart the global economy and bounce it out of a financial repression defined by low and falling real yields to one that at least initially is defined by rising nominal yields through higher inflation expectations. Ironically the shock that is needed would require a collapse in risk assets for policymakers to then really panic and attempt dramatic fiscal stimulus."The idea here is that some short-term pain in the term of a stock market drop or crash would look bad, but it would inspire movement from policymakers to do the one thing that could seriously sustain the economy over the long-term.It may not be a pretty sight for investors, but it the move could anchor inflation expectations and drive real economic growth, thus untangling the financial contradictions in the system and break the "repression."SEE ALSO:'An unsettled world': The CEOs of America's largest companies are worried about the economyJoin the conversation about this storyNOW WATCH: Couples improved their sex lives in a week with this one simple tip
Click here to read full news..