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Peter Hun

Paul Volcker: Full Recovery Is Years Away

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Wednesday, June 3, 2009 10:09 AM

While many experts in and out of the administration focus on signs of green shoots in the economy, former Federal Reserve Chairman Paul Volcker says recovery will be a gradual process.

An external adviser to President Obama, Volcker is best known for slaying inflation as a Reagan-era Fed chief.

“A full recovery will be a matter of years,†Volcker says.

The recession, which is now 18 months old, “is bound to be the longest… since World War II and could turn out to be the deepest as well,†he says.

A “truly massive fiscal and monetary stimulus is at work,†he said in a speech cited by Bloomberg News. The unprecedented economic intervention by the government to halt the recession will reverberate for years, he says.

“The federal government and the Federal Reserve have been forced to ride to the rescue by ways and means never before contemplated, implying both a degree of political intervention and political risk that are bound to preoccupy us for years.â€

As for rising debt, the United States has been spending beyond its means for a long time, Volcker points out. As a result, we face “an unimaginable budget deficit as far as one can see,†he says.

“Foreign countries have been for a long while willing to finance our excess spending, but that process can’t continue forever,†Volcker warned, calling on government to curb foreign borrowing.

The latest forecast predicts a federal deficit of $1.8 trillion by 2010 and matching tax increases of $1.1 trillion over a decade. This doesn’t even begin to touch the tens of trillions in entitlements coming due to the baby boomer generation, a tax burden that must be born, eventually, by today’s younger workers.

The current Treasury debt outstanding is $11.4 trillion, of which $7 trillion is held by the public. Nearly half of that is held by foreigners, largely the Chinese and Japanese governments.

Volcker isn’t the only economic luminary concerned about our foreign debt.

“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, at some point, it’s going to inflate its way out of the burden of that debt,†iconic investor Warren Buffett told CNBC.

Not surprisingly, the Chinese are moving away from the dollar, at least verbally. Students at Peking University laughed out loud this week when Treasury Secretary Tim Geithner told them in a speech that the dollar was safe.

Accordingly, individual Chinese investors are now rushing to hoard the precious yellow metal, hoping it will retain value if the dollar collapses.

"The declining value of the dollar along with the worsening economic outlook is forcing investors to seek other anti-inflationary investment tools, like gold," Ping An securities analyst Xiao Zheng told The China Daily.

China is the world's second-largest gold consuming country. In late April, the People's Bank of China announced its gold reserves had risen 454 tons since 2003 to 1,054 tons, a signal that the central bank is taking gold as a reliable hedge against financial uncertainties as fears over the global recession deepen.

Analysts say they expect the Chinese government would continue to raise its gold holdings as the yuan becomes increasingly internationalized.

Chinese demand for gold bullion reached 68.9 tons in 2008, up 176 percent from 25 tons in 2007.

The World Gold Council's Gold Demand Trends report for the first quarter shows gold demand in China jumped to 114 tons in the first quarter.

"If I look at 10 years from now, I do believe that the purchasing power of the dollar is going to be substantially less,†portfolio manager Axel Merk told The U.K. Guardian.

“Gold is ... the simplest way to play the devaluation of the dollar and potential inflation," Merk said.


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