Money Expert Taylor: Fed, Congress Can’t Stop Recession in ‘Miserable’ 2012

The United States is headed for another recession as the Federal Reserve and Congress have no more tools left to keep the economy moving enough to avoid another slowdown, says John Taylor, founder of the world’s largest currency-hedge fund.

The economy is due to cool off anyway, as the last recession began in 2007, and an end to money printing and stimulus spending will send the economy tanking anew.

“I am afraid that cutting the deficit means cutting final demand. It means the economy is going to slow," Taylor told CNBC. "It might not be a bad thing to cut the deficit but unfortunately, when you cut the deficit, you’re going to get a recession — you’re going to get a slowdown. The more you cut the deficit, the worse it’s going to be,” says Taylor, founder and CEO of FX Concepts, a New York hedge fund.

“I must say that next year is going to be truly miserable,” says Taylor, who manages about $8.5 billion and uses statistical models to help predict future movements in assets.

A recession will boost Republicans’ chances of taking back the White House in the 2012 elections, even if their spending-cut policies help throw the country back into recession, Taylor says.

Furthermore, the Federal Reserve might try more quantitative easing (QE), where it prints money in hopes banks take that money and fuel economic growth, but such polices haven’t worked in the recent past and won’t work in the future.

“I don’t think QE works very well because basically it puts money into the banks’ hands, and the banks aren’t lending it out. The banks are investing in markets and driving market prices up,” Taylor says.

In other words, only the markets here and abroad benefit from quantitative easing, but not normal people.

“It is not putting money into the hands of the consumer or of the small-business man.”

Nevertheless, such a scenario will unveil a counter-intuitive trading opportunity: the U.S. dollar.

Politicians will be forced to act and prep the economy for more long-term recovery.

“The more trouble we have for the debt ceiling the stronger the bond market will be and the stronger the dollar will be. It means we are going to do something,” Taylor says, referring to the $14.3 trillion government debt limit, which was recently broken and currently under analysis by lawmakers for an upward revision.

“And when we do something obviously that’s going to really drive the dollar up. Europe can’t do anything, Europe is falling apart. We can handle the austerity. We need the austerity in the long run.”

Bond markets are showing that many market players feel darker times are around the corner thanks to continued high unemployment rates, weak housing prices and sluggish economic growth in general.

The yield on the benchmark 10-year Treasury note fell below 3 percent recently, the first time since December, on evidence the economic recovery is losing momentum — and losing it fast.

"It does look like we have a pretty weak rebound, even weaker than we had considered," says Jason Brady, a managing director for Thornburg Investment Management in Santa Fe, New Mexico, according to Reuters.