Taylor says U.S. headed for recession

(Reuters) - The U.S. economy is headed for a new recession, said John Taylor, chairman and chief investment officer of FX Concepts, which should likely benefit the dollar and weigh on commodity prices. "It's a new recession. We're already growing, but the numbers show that the U.S. government is still the primary creator of this growth," Taylor said on Monday at the Reuters Investment Outlook Summit. Taylor runs the world's largest currency hedge fund with assets under management of around $8.5 billion. "I would argue that by the middle of next year, we will be in a recession and our fiscal hands will be tied," he said. Taylor has maintained in previous interviews that the Federal Reserve's quantitative easing program, designed as a way to help jump-start the economy, won't necessarily prevent a recession. Banks in a recession tend to demand the repayment of loans, and if the debt is denominated in the U.S. currency -- and in most cases they are -- then investors are squeezed as they scramble to find dollars to repay the debt. That should be dollar-positive, Taylor said. This was what happened in late 2008 when panic in the markets -- precipitated by the collapse of U.S. investment bank Lehman Brothers -- drove the safe-haven dollar higher against most major currencies. "It's kind of perverse. When the U.S. economy is doing badly, the dollar goes up and when the economy is doing well, the dollar goes down." Taylor's remarks dovetailed with Federal Reserve Chairman Ben Bernanke's comments on Sunday on the CBS program "60 Minutes". Bernanke said the Fed could end up buying more than the $600 billion in U.S. government bonds it has committed if the economy fails to respond or unemployment stays high. The U.S. economy grew at a modest 2.5 percent annual rate in the third quarter. Stronger growth is needed to create large numbers of new jobs and make a dent in unemployment, currently at 9.8 percent. EURO COULD FALL APART For now, all eyes are on the euro zone, which is facing a debt crisis. Theoretically, at some point the euro could fall apart, Taylor said, "What Europe has done is not enough. They have to have eurobonds," said Taylor. "You can't lend money to Ireland or Greece. You're just piling on more debt to them, and it's getting harder and harder to repay." Taylor said Portugal could be the next country to seek a bailout after Ireland, with Spain after that. This will push the euro to parity versus the dollar by next year, he forecast. In early New York trading, the euro was down 1 percent at $1.3277. In October, he told Reuters in an interview that the euro would most likely peak between $1.43- $1.45 in November and was most negative on the euro versus the dollar at a time when almost everybody was selling the greenback because of the quantitative easing factor.

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