The United States must preserve confidence in the dollar even as it looks at ways to combat the sluggish economy, Paul Volcker, a special economics adviser to U.S. President Barack Obama, said Wednesday.
The former Federal Reserve chairman said it is difficult to find any sector of the U.S. economy that has any "spark," and authorities should be examining what fiscal and monetary tools they have available.
"The challenge now is we have intervened, it becomes more and more difficult in the future, the monetary policy ... the fiscal policy. We sure have to maintain some confidence in the dollar or none of this would work," Volcker, who is chairman of the President's Economic Recovery Advisory Board, told a business audience in Toronto.
"Some people would say there's no possibility of a further stimulus program, but the risk is of course that would make things worse and you're going get a reaction that's unmanageable."
The dollar on Wednesday tumbled to a 15-year low against the yen and an eight-month trough against the euro on expectations the Federal Reserve will further ease monetary policy to jump-start the economy.
Volcker declined to comment on whether Fed Chairman Ben Bernanke should ease monetary policy further, though he said it is the kind of debate Fed officials ought to be having.
The Fed has kept interest rates near zero since December 2008 and pumped $1.7 trillion into the financial system through purchases of longer-term Treasury securities and mortgage-related debt.
Most analysts expect the U.S. central bank will launch a renewed round of bond buying, or quantitative easing, as soon as its next policy meeting on Nov. 2-3.
Volcker painted a bleak outlook for the U.S. economy, saying it was hard to find any kind of development that promises to produce a lot of expansionary momentum "in coming months, in coming quarters, even in coming years."
"It's very unlike an ordinary recession. This has not been an ordinary recession. This is an important shift in economic affairs around the world and it's going to take some time to get over it," he said. "We all face a problem of prolonged unemployment in the developed world."
Still, Volcker said that over time the United States must reduce consumption relative to production as a percentage of its economy and bring down its current account deficit.
Known for slaying inflation in the 1980s by hiking interest rates well into the double digits, Volcker said the rise of the price of gold to a record high was partly due to inflation fears, but he noted that inflation fears were not being reflected in bond markets.
"The markets for bonds and inflation-protected bonds don't show that at all. There is a lot of concern about possibly returning to inflation," he said. "I think it's reflected in the gold price."
Gold on Wednesday rose to a record high for a second straight day.
"I can't fully explain this dichotomy," Volcker said, "but I think part of it is the gold market after all is not a very big market."
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