Monday, December 16, 2013

What If There’s A Recession in 2014?

If policymakers were gunfighters, they’d be out of bullets: They have run out of effective policy tools to improve the economy.

So the question is simple: If there is a recession in 2014, and policymakers are out of bullets, how will it play out across the American economy?

What the Fed is looking at.
Recently, Deutsche Bank’s Jim Reid very astutely pointed out that the current “expansion” of the U.S. economy is on its fifth year—the seventh longest in history.

We are due for a recession.

Now, before facing up to a possible 2014 recession, let’s ask ourselves: What happened during the last recession?

No one can quite agree as to the specific causes of the 2007–09 recession—and fighting that particular fight isn’t the point of this essay. But we can all more or less agree that global overindebtedness caused a mini-Minsky Moment, whereby borrowers could no longer borrow enough to keep from defaulting on their previous loans. Hence September 2008. Hence the collective global “Ahhh!!!!” moment that we all recall with such sweet and fond nostalgia.

To stave off what looked like financial and economic Armageddon, the Treasury Department first under Henry Paulson and then under Timothy Geithner, and the Federal Reserve under Ben Bernanke, basically threw money into the economy: The Treasury’s Troubled Asset Relief Program (TARP) originally authorized $700 billion to buy up toxic assets, while the Fed created the Maiden Lane vehicles, lowered interest rates to zero (zero interest-rate policy, ZIRP), and simultaneously created money by way of the various iterations of Quantitative Easing (QE).

Combined, these Treasury and Fed programs prevented the bankruptcies of the so-called “systemically important” (a.k.a., “Too Big To Fail”) banks, and provided the U.S. Federal government with the cash to carry out the 2009 stimulus program. After all, had it not been for the Fed’s purchases of Treasury bonds by way of QE, the yields on the government’s bonds would have risen so high that the stimulus program could not have been financed, let alone the +$1 trillion deficits of 2009, 2010, 2011 and 2012.

But screw the deficit—the Treasury and Fed measures saved everybody’s bacon. Equities crashed? Houses underwater? 401(k)’s in the toilet? Thanks to TARP, ZIRP and QE, they rebounded.

Rather than take the hit, work out the bad loans, and organically regrow the economy, the Treasury and Fed measures were essentially morphine—or heroin—to dull the pain of the Global Financial Crisis: They made us feel great, but the disease is still there.

Overindebtedness. Bad debts piled on top of bad debts.

Now because of the Treasury’s and especially the Fed’s morphine/heroin drip, starting in Q3 of 2009, the American economy’s gross domestic product has been expanding, which economists hail as the end of the 2007–09 recession, and the beginning of the current “expansion”.

(Re. the “expansion”: Nevermind that unemployment was scrapping 10% as late as Q3 of 2011, and that as of Q4 of 2013, we are still at 7% U-3 unemployment—and this U-3 figure ignores the long-term unemployed, who have simply given up, reducing the employment participation rate to historic lows, thereby skewing the real unemployment figure something awful.)

So here we are in Q4 of 2013, staring down the barrel of 2014, suspecting—fearing—that we might have a recession staring right back at us.

Question: What could the Federal government and the Federal Reserve realistically do, to avert a recession in 2014? Or if not avert it, at least ameliorate its effects?

Oh boy . . .

Insofar as the Federal government is concerned, realistically, nothing. In 2008, facing what appeared to be the end of the financial world, Congress was snookered into agreeing to the Bush Administration’s $700 billion TARP bailout. Then in 2009, the incoming Obama Administration had two winds at its back—the Global Financial Crisis, which required the incoming administration to do something, anything; and the fact that Obama was the new prez, who’d won decisively with his deceptive talk of “hope”. Thus the $787 billion stimulus package.

Combined, the Bush TARP and the Obama stimulus were some $1.5 trillion mainlined into the American economy.

Today, five years after his inauguration, and after the Government shutdown and the botched Obamacare launch, Obummer just doesn’t have the pull. More to the point, the Democratic caucus does not trust him. So Democrats on the Hill will not stick their necks out for an Obama stimulus program. So the O-Administration’s economic brain trust might come up with all sorts of plans to preëmptively stop a 2014 recession—but they don’t have the votes to make these plans happen.

As to a repeat of the Henry “Give-us-all-your-money-or-the-banks-will-die!” Paulson scare tactics—they won’t work today, not after the nasty taste left by the one in 2008.

So macro-economically speaking, Barack Obama is walking around with an empty peashooter: He can’t even wave the threat of using it without seeming foolish.

Turning now to the Federal Reserve: They might be packing a big ol’ .45 Magnum, but they are most definitely out of bullets. They can’t lower interest rates any further than they have—what are they going to do, start charging people who deposit money in banks? This is the problem with hitting the lower bound: You can’t go any lower than ZIRP. At best, the Fed could expand QE even further, and buy up even more Treasury debt. But then any impact from more QE will be marginal, assuming it has any effect at all.

So if the Federal government and the Federal Reserve are essentially out of bullets, what’s going to happen to us law-abiding citizens when the Big Bad Recession comes rolling into town?

First off, no one can seriously or responsibly doubt that a recession will not come. Even if the American economy by some miracle manages to sneak through 2014 with positive numbers, a downturn will hit in 2015 anyway. Don’t believe me? Check out this chart:

Click to enlarge.

I have grounded, non-orthodox reasons to think that a recession will hit in 2014, reasons which I will expand upon during my live presentation next Thursday (see here). But even if you don’t buy my heterodox reasons, the orthodox business cycle would confirm that a recession is on its way.

So to weather it, you’d have to know what’s going to happen.

A basic outline is pretty clear:

Stocks will take the brunt of the beating, once recession-fever hits—after all, equities are floating on nothing but QE, and everybody knows it.

Bonds won’t do so well either, at least not corporate issuance. Treasury bonds will continue trending with flat yields, if only because the Federal Reserve will probably signal that it will continue (or even expand) QE. Treasury bonds will also continue high because of a simple safe-haven play . . . but there won’t be the sense of today’s Treasuries being the rock-solid Treasuries of yore: There will be more volatility in the T-bond markets. A greater willingness to exit Treasuries at a moment’s notice, especially if there are hints of inflation.

Real estate? Forget it—it’ll be another popping bubble, with the same damage as the last one.

The only store of value will be commodities. Not just precious metals, but all commodities: Industrials, agros, and fossil fuels. It will simply make more sense for the investment community to rotate out of iffy stocks and dodgy bonds, and rotate into physical commodities. Why? Because there is too much liquidity.

If there is such a rotation from equities and bonds into commodities, then the prices of food and transportation will rise—precipitously.

Thus we will have inflation, possibly severe inflation. But the Fed will be loathe to rein in inflation via interest rate hikes.

You know the saying about owning a hammer, and everything looking like a nail? The Fed cannot conceive of any way in which to help the economy that does not involve keeping interest rates low. The Fed under Bernanke (and Greenspan previously, who was guilty of the same sin) does not understand that it is not the job of the Fed to maintain full employment, stable prices, and a solvent banking sector. The Fed’s only mission is to ensure the stability of the fiat currency. Full employment? That’s the Federal government’s problem. Banking sector solvency? That’s not the government’s problem, that’s the free market’s problem.

But the Fed, blinded, thinks that it has to support the banking sector and try to do something about employment. Thus it has lowered interest rates to laughable/insane levels. And it cannot raise them because of its own bias: “You don’t raise interest rates during a recession” is practically a Zen koan with the Fed economists.

If commodities start to rise, as a market reaction to falling stock prices and a need to find an investment safe-haven, then inflation will rear its ugly head and hurt the American economy very, very badly. But the Fed—repeating exactly the same error that brought us stagflation—will not raise interest rates to quell it. The Fed will be too frightened of smothering the economy during a recession to raise rates and defend the currency.

Thus the Fed will stand pat with ZIRP and QE, come a recession in 2014.

In other words, the government will not be able to save the economy. This is the single point I’m trying to make here: If you think for a second that the Federal government and the Federal Reserve will step in once again and save everyone’s bacon (like the last time), then you have not been paying attention to what I’ve been saying—or been paying attention to how truly helpless the Obama Administration and the Fed really are.

The Federal government and the Federal Reserve are out of bullets.

Which means we are on our own come a recession. And we’ll be paying not only for the recession of 2014, but also for the recession of 2007-09, which was deferred, but not worked out.

In other words, a recession in 2014 just might well be The Big One.

Oh boy . . .

Okay, that’s my thinking—here’s my pitch: This coming Thursday, at 8pm EST, I’m going to give a live presentation that’s going to look into all these issues in a lot more detail—really start us thinking seriously about what to do, if and when a recession hits the American economy. The title of this web seminar? Simple:

What A Recession in 2014 Will Look Like

Click on the link—and in case you missed it, here it is again. In this live presentation, I will expand on this brief essay, and will take audience questions, too.

If you’re not sure if I’m an idiot or not, check out my appearance on Max Keiser last year and see for yourself:




Hope to see and speak to you on Thursday!


If you like what I’ve written, then please subscribe to my mailing list.

I’ll only contact you with things that are worth your while.

Thank you.

—GL

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18 comments:

  1. you ignore the black swan ...global currency reset.
    A myth on par with reptilians and breakaway' civilizations? ...perhaps.

    Do you think TPTB aren't aware that they're painted into a corner and haven't formulated an outlet?
    Ah yes... you're gonzo the mocker of deus ex machina.

    Vamos a Ver

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  2. I was sota hoping for an asteroid strike the size of Australia.

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    1. Your not getting off that easy mister....

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  3. "But the Fed, blinded......". No sir, the Fed's not blinded. They have 20-20 tunnel vision and it's clear as a bell ringing at the top: Keep shoveling free cash to the top 1% for as long as the sheep are asleep. (I realize you know this, already, but just to make a point....)

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  4. Not sure how the RE market would seriously tank again in most of the country given the pricing is much lower, affordability ratio is higher, and much of the foreclosed property has been taken off the market by cash buyers (therefore imposing no leverage risk to the financial system). Down, yes, but certainly not another epic crash.

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    1. Everywhere I go,I see empty houses and commercial properties.I see an epic crash coming.

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  5. Unless one goes on disability, becomes homeless, goes back to college on the back of loans and grants, or moves back in with parents or other friends or family...how does one "give up" looking for work? You keep looking, regardless of what the stats say.

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  6. For those of you who sit back and scoff at others as if you were the deciding factors in life, now is the time to sit still and listen. The things this man says resonate with the innate feelings that I have.

    Perhaps now is the time to prepare ourselves in case his forecast is accurate. How many people on the Titanic scoffed when told to abandon ship? When they did run for the lifeboats, they were all gone.

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  7. GONZALO, AMAZING POST!!
    JUAN FROM ARGENTINA, I AGREE 100%, THERE SEEM TO BE NO MORE TOOLS AVAILABLE. CERO INTEREST RATES, NO CHANCE TO GO LOWER, QE´S DIMINISHING RETURNS. THE CREDIT CYCLE SEEMS TO HAVE REACHED IT´S PEAK AND ...... IT STARTED IN THE 1980S AND WE ARE MOST PROBABLY CLOSE TO A STEEP CORRECTION OF THE SUPERCYCLE...........MONETIZATION IS CHASING FINANCIAL ASSETS, NOT CREATING THOROUGH EXPANSION OF THE REAL ECONOMY.

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  8. Commodities can not absorb the capital flows. Arguably no market can. The problem of ever increasing capital flows (relative to market size) has been growing for a while. In 2000 it went from US stocks into everything else, creating the housing bubble among other things.

    It's like one big bubble and you can just watch it rotate from thing to thing. Where to next? Who knows, but commodities look well supplied.

    There's probably enough capital to develop a whole continent now. Africa? We are awash in money looking for a purpose.

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  9. GL You sure you didn't mean .44 magnum?

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  10. what ever happened to the hyperinflation GL was always going on about?

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  11. Not disagreeing with you on commodities and inflation, but it is absolutely false that the Fed is out of bullets.

    From their point of view (the hammer/nail metaphor), the universal solution they have for any problem is more inflation. Market slump? Print. Economy in the dumps? Print. Global financial crisis? Print, print, print and then print some more. And the Fed still has many ways left to cause more inflation.

    1) They can stop paying interest on the bank reserves, forcing the banks to invest these reserves elsewhere, i.e. forcing that money out into the economy.

    2) They can start lending directly to businesses and individuals, if the banks won't.

    3) They can charge penalty fees on deposits, resulting essentially in negative interest rates, forcing the people to spend their money.

    4) They can even introduce money-like instruments with "expiration dates" - in fact, banknotes with expiration dates have been tried in the past.

    And don't forget that "food and energy don't count when computing inflation", so the increased costs of fuel and other commodities won't be immediately resulting in inflation that counts in the view of the Fed.

    And if the Treasurys start falling, the Fed can monetize even a larger part of the government debt, if they want to. They can also start buying corporate debt.

    The only thing they cannot do is saving the dollar while doing all these things (staving off "deflation", saving insolvent banks, monetizing government debt). So, the show will be over only when the world dumps the dollar - and that isn't going to happen any time soon. Because, what are you going to replace it with? Gold? Euros? Yuans? Bitcoins? Gimme a break!

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  12. I'd offer that the man that sold "hope" has enough pull to offer a new kind of stimulus program that would solve all the things the "experts" believe is a problem. They seem obsessed with generating "positive inflation" of prices by raising the velocity of the currency.

    I couldn't agree with you more that the crooks probably couldn't pass another handout bill to the fascist empire of fake "corporations", but they certainly could and I believe will pass a new kind of "stimulus", namely a direct handout to everyone with a SSN in the form of a tax rebate or some other made up term funded by the Fed and far larger than the silliness that W. "delivered" to the masses.

    That could be there new policy trick. It certainly has vast potential to generate the rise in prices they want to see, not just asset bubbles. I've enjoyed your articles for some time now. Please consider this and reply if you get a chance GL.

    As to those who mocked GL about hyperinflation, I believe that's the end path for the USD. You should check out Michael Maloney who has offered a compelling idea about how it could come about through first another "recession" meaning a severe deflation as the market attempts to clear itself followed by inflation like I've suggested above.

    As a side note, printing massive amounts of currency and handing it to a large percent of the population was a significant contributor to the Weimar hyperinflation.

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  13. More than 100 million working age Americans are unemployed and the unemployment rate is 7%?Proof that figures don't lie,but liars figure.

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  14. "But the Fed, blinded, thinks that it has to support the banking sector"... What?

    The Fed "IS" the banking sector... but don't tell anyone, it's a secret!

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  15. Unless there is war spending, or a speculative bubble, capitalism is in a recession.

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  16. You yourself once predicted hyperinflation.
    Near everyone expects things to crumble at some point.

    Why would you think the savvy owners of the big international banks would not sense things were close to the edge? Why would you presume they have no plan beyond that point?

    Look at china gobbling up gold, look at their swap agreements, look at their stated intentions of replacing the USD with something else.

    Look at the rapid adoption of police state in the U.S and the willing involvement of near all the other western nations to spy on everything. What are they really preparing for?

    It does seem plausible that China,Russia,the rest of the BRICS and other nations will at some point in the not to distance future formally introduce their alternative to the USD/petrodollar.

    You don't even mention this possibility, not even in passing.
    And this from the guy who first got notoriety from his hyperinflation call.

    You were on the right track, just wrong in the all important timing aspect (ain't timing a bitch?)

    The USD is going down and I bet the U.S. top dogs will attempt to negotiate some sort of 'seat at the table' arrangement with the eastern challengers before things completely blow up.

    Your article seems rather provincial in its scope.
    Getting conservative with the years?

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If you have a question or a private comment, do feel free to e-mail me at my address expat229@gmail.com.

GL