Paul Volcker Is Scared That the Trade Deficit Will Fall

Wednesday, 28 April 2010 21:21

It's possible that he doesn't know this, but it is what he said. According to the NYT, Volcker said that: "He [Volcker] and other speakers expressed fear that without some action in the next year or two that reduces deficits for decades to come, interest rates could spike, the dollar could lose value or some other financial crisis would occur."

A drop in the dollar is the only plausible way to get our trade deficit closer to balance. A large trade deficit, by definition, means that the United States must have low national savings (barring an extraordinary and unprecedented uptick in investment). Low national saving means that we must either have large budget deficits or very low private savings, or some combination. So proponents of a high dollar (like Mr. Volcker) want a large budget deficit and/or very low private savings. It would have been helpful to point this fact out to readers.