Guest Post: What If There's A Recession In 2014?

Tyler Durden's picture

Submitted by Gonzalo Lira via Gonzalo Lira blog,

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?

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:

 

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NotApplicable's picture

What is this "last recession" nonsense?

corporatewhore's picture

let's count the ways we've recovered:

labor participation rate----check

growth in wages---check

growth in jobs available--check

real unemployment rate---check

real foreclosures occurring or hidden off market by banks--check

 

i could go on but the champagne's getting warm.  yeah, a real recovery enjoyed by all.

Boris Alatovkrap's picture

Is better than is recover, is absolute stellar prosperity this year... ...for global bankster class.

Pladizow's picture

As long as everyone is preaching collapse - it wont happen!

Skateboarder's picture

"What if" huh... Gonzo must not have seen the DJIA '29 vs '13 chart.

Pladizow's picture

Lira excludes:

1. Pensions need 8% and will look to equities

2. Sovereign debt crises will chase capital into equities

3. Europe and Japan are worse off - capital will flee to US equities

4. Threat of bail-ins - more money may flee to equities

5. Fed stops paying interest on excess reserves - more money into trading equities.

Oracle of Kypseli's picture

<<< What does the fed do in the whiff of a recession? >>>  

As everyone knows, anticipates and expects: MORE OF THE SAME

B.J. Worthy's picture

1. Pensions can't increase equity exposure on a whim.

2. Sovereign debt crises will chase capital into GOLD

3. Europe and Japan are worse off - capital will flee to GOLD

4. Threat of bail-ins - more money may flee to GOLD

5. Fed stops paying (virtually zero) interest on excess reserves - banks won't notice because they're already in the after-hours of their BTFATH party.

Pladizow's picture

1. Of course they can

2. So why not for the last 2.5 yrs

3. Gold is not large enogh for global capital

4. Likely but not on the same scale as equities

5. Banks will have more capital to BTFATH.

fasTTcar's picture

If you like your recession, you can keep your recession.

ZH Snob's picture

Americans seem to have a collective john-wayne-romantic-fantasy rooted deep in their denial, mixed of course with a weary cynicism that misinforms them that everything comes out OK in the end for Ameriica, that boys will be boys, that their lying and stealing is nothing new.  and back to sleep they go.

what they fail to comprehend is this movie will not have a happy ending, and the boys have grown into relentless greedy savages who are waging economic war against them and will not stop until they are destroyed

corporatewhore's picture

we are a part of a rhythm nation

AGuy's picture

"What If There's A Recession In 2014?"

The Head line should have been "What if there ISN"T a recession in 2014?"

Obamacare has virtually guarenteed a recession in 2014. since people will have to fork over a lot more money for Insurance premiums AND pay a much higher deductable. The Healthcare sectors is going to take at least a 10% cut if not more, unless it repealed soon.

 

hedgeless_horseman's picture

 

 

Recession?  The business cycle is dead. Bernanke and the other central bankers drowned it and the bond vigilantes in a deluge of liquidity.

It is sychronized diving from here on out.

Joe Davola's picture

It isn't a recession, unless they say it's a recession.

insanelysane's picture

it's a slowww, jobless recovery, dammit!

hedgeless_horseman's picture

 

 

It's an, "L-shaped recovery."

Boris Alatovkrap's picture

Slow, jobless economy with lots inflation, little growth, dropping productivity, evaporation of wealth, disintegration of individual liberty,... but lots, lots, lots, lots of money, more money can even print!

Harbanger's picture

There's too much liquidity in the banking system but they haven't eased lending or made money cheap on main street since 2008.  I think that's the next card (again).  That may be what sets off runaway inflation.

Boris Alatovkrap's picture

Too much liquidity!? No, that is like too much vodka for alcoholic lush, like too much viscosity in bowel infect by dysentery, too much anti-coagulant in blood stream of sickle cell anemic.

hedgeless_horseman's picture

 

 

Too much liquidity!? No, that is like too much vodka for alcoholic lush...

That, Boris, may be the smartest comment I have read on this site this year.

The third option is for the Federal Reserve to create credit to pay the bills Congress runs up. Nobody objects, and most Members hope that deficits don't really matter if the Fed accommodates Congress by creating more money. Besides, interest payments to the Fed are lower than they would be if funds were borrowed from the public, and payments can be delayed indefinitely merely by creating more credit out of thin air to buy U.S. treasuries. No need to soak the rich. A good deal, it seems, for everyone. But is it?

 

http://archive.lewrockwell.com/paul/paul334.html

SDShack's picture

That's the end game. The threat in 2008 was bond vigilantes, and that was born out in the EU in 2009, 2010, 2011, 2012, etc. That's why the Fed owns 1/3 of the bond market. Another recession means MOAR QE until the Fed owns 51% of the bond market, and thus effectively neutrailizes the bond vigiliantes. That takes a big weapon away from what little real financial market still exists. Then all that printed money liquidity has very few places to go. It has to go into equities, or real assets. This is just being set up as a repeat of 2008 all over again. A recession to crash equities and real assets, but without the option to protect yourself with bonds since the Fed will control that market. So it is panic the serfs to sell whatever real assets and equities they have by tanking that system with an engineered recession. Then the elites BTFD using gift money from the Fed. One more time will just about complete the wealth transfer from the middle class to the elites.

DaddyO's picture

Time to join the resistance movement...

Resist the FED....

http://www.dragondaymovie.com/video/video-6/

DaddyO

madcows's picture

I don't know about that.  4% mortgage rates, buy a car with zero down and no job, etc... and people still aren't going all out.  It's tough to have runaway inflation when people don't have income, and are loaded down with existing debt.

The next bullet would be to drop money from a helicopter, b/c their attempts to issue cheap credit through the banks hasn't really worked.

walküre's picture

They forgot that 99% of the people are not wired to put more leverage upon leverage. That's a privilege only reserved and understood by 1% of the population. Purely coincidental that this group of 1% has managed to become filthy rich.

Joe and Jane Sixpack may have taken the cheap credit offerings when they came in, they may have overextended themselves and run into a trap but they haven't even come close to understanding how cheap and cheaper credit can work for them if they maintain their credit ratings.

That is because neither Joe nor Jane Sixpack have a direct line to Ben or Janet to get the latest hot stock tips and get the heads-up about how many billions the Fed will be rotating into the TBTF banks which are serving the 1% who understood and played the game well.

The Fed will do nothing to support Joe or Jane Sixpack as they have feasted on their corpses and are not interested to reviving zombie consumers. Get it into your heads. The Fed is now in control of government more than ever as it owns more of the treasury's debt than ever. They will come for the collateral now to satisfy the debt service on higher interest rates.

The Fed wants higher rates to keep pleasing the 1% in this next round of "Fuck me harder Ben and Janet". Unless we fuck them back and shoot them, the parasites will not stop torturing the host which is all of us.

Harbanger's picture

"their attempts to issue cheap credit through the banks hasn't really worked."

Sorry, I hadn't seen your reply.  A car with zero down may just be dealerships moving their inventory rather than sitting on it.  Rates are low now, but they made it much more difficult to qualify for a mortgage or line of credit since the last crash. (rightfully so because of all the subprime defaults)  So there's room for them to go back to easy/subprime credit lending to pump liquidity into Main street.

MachoMan's picture

We have cost push inflation, not demand pull...  In other words, the effects of inflation can come at us in two primary ways...  ground up and top down...  and while I agree that ground up isn't happening, top down is absolutely happening...  this is why we get a bifurcated economy where everything we use and need (that we don't buy on debt) is skyrocketing in price, while everything we consider assets (and is debt laden) is decreasing...  [demand pull would have more universal price increases].  If you have enough money, then you can get out of the way of the steam roller....

Why do you think they want to ignite inflation proper?  The money drop to the banks is exactly what they want...  the system is designed for a purpose, after all...  the problem for them is that an ever increasing amount of the money that is supposed to be locked up in the system is seeping out...  this is where the effects of inflation come into play...  because it is possible to have inflation without having price increases if velocity is zero...  however, the best laid plans of mice and men.

corporatewhore's picture

people aren't running out

its because my EBT card is zeroed out, i need a medical procedure at the emergency room (FREE!) and i've got to get a free turkey for xmas being handed out at the corner by some charity.

btw, i need my mega millions ticket and also give me one of those smirnoff airplane bottles.

AmCockerSpaniel's picture

This recession talk is of little use here. We are informed, and for the most part have taken what ever measures we can. As for the rest..... They will just keep doing what they have been doing (it's all they have, or want to do). They will print to pay unemployment, and snaps. That is all. The gulf between the 0.1% and everyone else will just keep getting wider. They like that (they are not trying to do anything about it...RIGHT) It will end in war, here or over seas.

Jumbotron's picture

What the HELL does he mean that they've run out of bullets?

THEY JUST 3D PRINT MORE FUCKING BULLETS !!!!!!

These asshole anal-cysts.....errr.....lysts think that QEternity's volume control is set to 10 already.  Bullshit....it's not even up to 3 yet.  And the dial goes to 11 !!!!!!

Here's what they are going to do.  They are going to hyper-inflate this debt away.......because they are more afraid of a deflationary implosion than ANYTHING else.  Besides......there is no money to be made in a deflationary collapses until afterwards.  But a QEternity inspired carry trade all the way to the currency collapse......OH YEAH !!!!

DOW 35,000 here we come.  And let a recession come.  Fuck it !    That will just allow the Fed and the psychopaths to consolidate more power.  Think about it.  You think the politicians have ANY answers for the failing economy.  They abdicated that role 100 years ago this year.  So they are automatically, both Republicans and Democrats, going to tell Yellin and the Fed to "get to work".  Do whatever is necessary to ease the pain of my constiuents so I can keep my job and my paycheck and my perks and most importantly of all.......my pension.

Mark my words.....you haven't seen ANYTHING yet by the Fed.

Recession.....bah !!!!

Strider52's picture

Like asteroids and earthquakes, it's not a question of if, it's 'when'.

Boris Alatovkrap's picture

Most worse part of asteroid is lasting itch and chronic inflamation.

Boris Alatovkrap's picture

Worse part of central bank fiat regime is chronic inflation.  Boris is preference asteroid.

Boris Alatovkrap's picture

Worse part of central bank fiat regime is chronic inflation.  Boris is preference asteroid.

TheFourthStooge-ing's picture

"This is it, Lamont! This is the big one! You hear that, Elizabeth? I'm comin' to join you!"

DaddyO's picture

Wasn't Lamont the son?

DaddyO

Bryan's picture

They are not "out of bullets" by any stretch.  There's lots more paper and ink left, damn the hyperinflation, FULL PRINT AHEAD!

insanelysane's picture

Agree.  All they need to do is eliminate the income tax and the economy would soar.  They could then just pay government expenses with freshly printed stuff.

Bryan's picture

Silly, isn't it?  I don't get their approach.  It's OK to print money and increase the debt into the trillions, because debt doesn't matter and can be inflated away.  But it's not OK to print money indefinitely because hyperinflation is an issue?  I'm sure in their twisted minds that hyperinflation really is OK (as obviously the Zimbabweians and Weimarians thought too) but it's just a hassle to keep issuing bills with 2 or 3 more zeroes on them.   I think they really think this way... at least that's the attitude I remember from Econ 101 class in college.  Seriously.

XitSam's picture

"... basically threw money into the economy"

Please correct me if I'm wrong ... they didn't throw money, they threw more debt!

BigJim's picture

 Agree.  All they need to do is eliminate the income tax and the economy would soar.  They could then just pay government expenses with freshly printed stuff.

Agree also. Bammy can't get the Repugs to agree to a 'stimulus package'? Sure... but they'd eat up a 'tax-elimination' package like it was going out of style. And the QE necessary to 'pay' for it.

Private sector generation of moneylike collateral helps policymakers over long periods by:

  • Slowly reducing the demand for money
  • Increasing financial deepening
  • Supporting financial globalization

The more restricted the private sector’s ability to create safe, liquid, and moneylike collateral, the harder the public sector must work to supply it through deficits and easy monetary policy.

And there goes the problem with Volker making CDO's no longer collateral for more credit creation!

 

naughtius maximus's picture

Ha!

 

Meanwhile in a congressional office a desparate politican reading zerohedge gets this great idea.. Of course! we don't have to tax people! WE CAN JUST PRINT THE MONEY!!!!!

 

But I've thought about this happening for years. You know it, I know it. This IS GOING TO HAPPEN!!!

Think how popular this is going to be. Its going to be huge!

 

 

wide is the gate that leads to destruction....

JamesBond's picture

once you embark on a ZIRP policy, nothing will or can change the status quo of interest rates except destruction of the economy or war.

 

 

jb