Volker: Deficits pose real danger to economic stability

Former Federal Reserve Chairman Paul Volcker (REUTERS/Jonathan Ernst)

Former Federal Reserve Chairman Paul Volcker warned on Friday that trillion-dollar deficits posed a threat to the stability of the U.S. economy and the dollar, and said he is frustrated by the gridlock in Washington.

Speaking before the World Affairs Council of Oregon, Volcker said that “prolonging trillion dollar deficits can’t be a reality” and that the United States is on course to have its public debt exceed the size of its gross domestic product.

“One way or another, we do have to return to a balanced budget,” he said in prepared remarks.

Volcker’s speech came on the same day that the Congressional Budget Office said the U.S. budget deficit had totaled $871 billion for the first seven months of the year, which is significantly above the previous year’s pace. On Thursday, Vice President Joe Biden led a bipartisan meeting in an effort to strike a deal with Republicans on cutting the growing federal deficit and averting a default.

They face an August 2 deadline to raise the country’s $14.3 trillion debt limit.

Volcker, who stepped down early this year as the chairman of President Barack Obama’s Economic Recovery Advisory Board, said he was concerned about how the U.S. consumes and borrows “to the point that China, Japan and other foreign countries hold more than 5 trillion dollars of U.S. government obligations.”

“Consider that statistic in the light of prospects for continuing deficits, doubts about future inflation and the international stability of the dollar,” he said, noting that the U.S. is running out of time to fix things.

In order to address the deficit, Volcker said he agrees lawmakers need to tackle discretionary spending, an area that could help the U.S. save $300 billion from present projections by 2020. But that alone, he said, will not be enough to address the trillion dollar deficits.

“I will put the point bluntly,” he said. “It is simply unrealistic and irresponsible to believe budgetary balance can be achieved without higher revenues relative to GDP. We won’t generate those higher revenues without tax reform.

Separately, Volcker also discussed his views on the progress made so far on the Dodd-Frank Wall Street overhaul legislation and other efforts around the world to bolster regulation of the financial markets.

Volcker was the driving force behind a pillar of the Dodd-Frank law known as the Volcker rule, which cracks down on proprietary trading by big banks. Although he no longer has a formal advisory role in the administration, he still visits the White House on occasion.

In particular, he said he was concerned about a failure to properly address certain key areas including credit-rating agencies, accounting issues and money market funds — an issue the Securities and Exchange Commission plans to explore in a roundtable discussion next week.

“Taken all together, my personal grade on financial reform is incomplete,” he said, noting that it is even more lacking abroad than in the U.S. “I do not equate incomplete with out of time, but I fear that momentum in the reform effort is waning.”

(Reporting by Sarah N. Lynch; additional reporting by Caren Bohan, Alister Bull, and Richard Cowan; Editing by Bernard Orr)

Copyright © 2011 Reuters

8 Responses to "Volker: Deficits pose real danger to economic stability"

  1. Almandine  May 8, 2011 at 4:56 pm

    Tax reform explained by David R. Kamerschen, Ph.D. Professor of Economics.

    Suppose that every day, ten men go out for beer and the bill for all ten comes to $100…

    If they paid their bill the way we pay our taxes, it would go something like this…

    The first four men (the poorest) would pay nothing.
    The fifth would pay $1.
    The sixth would pay $3.
    The seventh would pay $7.
    The eighth would pay $12.
    The ninth would pay $18.
    The tenth man (the richest) would pay $59.

    So, that’s what they decided to do..

    The ten men drank in the bar every day and seemed quite happy with the
    arrangement, until one day, the owner threw them a curve ball. “Since
    you are all such good customers,” he said, “I’m going to reduce the cost
    of your daily beer by $20″. Drinks for the ten men would now cost just
    $80.

    The group still wanted to pay their bill the way we pay our taxes. So the first four men were unaffected. They would still drink for free. But what about the other six men ? How could they divide the $20 windfall so that everyone would get his fair share?

    They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer.

    So, the bar owner suggested that it would be fair to reduce each man’s bill by a higher percentage the poorer he was, to follow the principle of the tax system they had been using, and he proceeded to work out the amounts he suggested that each should now pay.

    And so the fifth man, like the first four, now paid nothing (100% saving).
    The sixth now paid $2 instead of $3 (33% saving).
    The seventh now paid $5 instead of $7 (28% saving).
    The eighth now paid $9 instead of $12 (25% saving).
    The ninth now paid $14 instead of $18 (22% saving).
    The tenth now paid $49 instead of $59 (16% saving).

    Each of the six was better off than before. And the first four continued to drink for free. But, once outside the bar, the men began to compare their savings.

    “I only got a dollar out of the $20 saving,” declared the sixth man. He pointed to the tenth man,”but he got $10!”

    “Yeah, that’s right,” exclaimed the fifth man. “I only saved a dollar too. It’s unfair that he got ten times more benefit than me!”

    “That’s true!” shouted the seventh man. “Why should he get $10 back, when I got only $2? The wealthy get all the breaks!”

    “Wait a minute,” yelled the first four men in unison, “we didn’t get anything at all. This new tax system exploits the poor!”

    The nine men surrounded the tenth and beat him up.

    The next night the tenth man didn’t show up for drinks, so the nine sat down and had their beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

    And that, boys and girls, journalists and government ministers, is how our tax system works. The people who already pay the highest taxes will naturally get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.

    For those who understand, no explanation is needed.

    For those who do not understand, no explanation is possible.

    • Carl Nemo  May 8, 2011 at 11:50 pm

      “Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas, where the atmosphere is somewhat friendlier.” …extract from post

      A superb allegory my friend in thought. : )

      What’s interesting is the wealthy haven’t been showing up for some time and have been leaving this country en masse’ for the past thirty years via the off-shoring their corporate interests, so too their banking to tax free havens and in many cases alternate safer places to live such as the Nordic countries, France, Switzerland and other safe enclaves in the world. America is nothing but an expendable, doormat nation to them.

      The America we once knew is devolving into one big “Detroit” from coast to coast in addition to an abject, poverty stricken barrio from south to north in Cali and the American Southwest and Texas. / : |

      Carl Nemo **==

      • Almandine  May 9, 2011 at 9:58 am

        I guess with the highest corporate tax rates in the world…

    • woody188  May 9, 2011 at 9:12 pm

      Actually, to make it accurate to our system, the 10th man still shows up and drinks, but he sends his riches to a Caribbean tax haven and claims to be a poor man and unable to pay as well. So they call up their friends in Asia and ask them for a loan on the beer they already drank, and continuing loans on the next 30 years worth of beer until their Asian friends finally say enough is enough.

      • Almandine  May 9, 2011 at 10:04 pm

        Nope… that would be the tax man – and his banker – who drink without paying.

        • woody188  May 9, 2011 at 11:25 pm

          LOL, those two are in the back taking it from the tap!

  2. bogofree  May 8, 2011 at 7:20 pm

    Nice….very nice. I’ll gladly grab it.

    Deficits pose a danger according to Volker. What insight! I guess if I was making 50K and had a debt of a million I’d be in danger.

  3. Asleeper  May 10, 2011 at 5:30 pm

    Actually, the tenth guy in the bar is a banker or a corporate CEO, who makes all his money via a system that takes the other nine guys’ bank deposits, builds a huge pyramid of credit on it, and lends it back to them or uses it to found a business. In other words, those nine guys were actually buying their own drinks all along for the most part, and the tenth guy was taking all the credit for it.

Comments are closed.