Rubin, Volcker Say Investors May Avoid Buying Dollars

(Update2)

By Kevin Carmichael


Nov. 15 (Bloomberg) -- Robert E. Rubin, Treasury secretary under President Bill Clinton, and former Federal Reserve Chairman Paul Volcker said foreign investors probably won't keep increasing dollar holdings, raising the risk of a slump in the currency.

Failure by the U.S. government to shrink its budget deficit may spook the central banks, hedge funds and others who have been buying Treasury notes, Rubin said. Volcker said the U.S. borrowing requirements raise the risk of a ``crisis'' in the dollar as soon as the next two and a half years.

``It seems almost inconceivable that this will continue indefinitely,'' Rubin, who now chairs Citigroup Inc.'s executive committee, said in a videotaped message for a dinner hosted by the Concord Coalition yesterday in New York.

Rubin, 68, who served as Treasury chief from January 1995 to July 1999, helped engineer economic policies that allowed Clinton in 1998 to claim the first budget surplus in almost 30 years. The dollar, measured against the currencies of the largest U.S. trading partners, rose 14 percent under his tenure.

The Arlington, Virginia-based Concord Coalition was founded in 1992 by the late former Senator Paul Tsongas, a Democrat from Massachusetts, and former Senator Warren Rudman, a New Hampshire Republican, to lobby for reducing the fiscal deficit and raise awareness about the cause and consequences of the persistent shortfall.

Dollar's Decline

The U.S. currency has fallen in recent years, in part because of concern America will fail to attract enough capital to finance its borrowing. The Federal Reserve's dollar index has declined 27 percent since December 2001. The dollar is down 7.4 percent against the euro this year and is little changed versus the yen.

``It's incredible people have gone on so long holding dollars,'' Volcker said during a panel discussion at the event. ``At some point, you will get a situation where people have had enough,'' he said. He added that he wasn't ready to ``extend'' a previous prediction of a crisis within two and a half years.

Foreign investors now own about half of the $4.3 trillion of Treasuries outstanding, highlighting the threat to the dollar should they lose confidence in U.S. policies.

The U.S. budget situation must be addressed now because the government is just five years from ``rapid acceleration'' in spending tied to Social Security and Medicare, Rubin said. He reiterated that the incoming Democratic majority in Congress and President George W. Bush should raise taxes to reduce the deficit.

Tax Reductions

Bush says the tax cuts he enacted since 2001 spurred the economy out of recession, boosting growth and government revenue along with it. The U.S. government recorded a budget deficit of $248 billion in the fiscal year ended Sept. 30, the smallest in four years, as revenue for corporate and individual taxes surged.

That won't last without policy changes. Combined with net interest payments, Social Security, Medicare and Medicaid will absorb almost three quarters of government revenue by 2016 from 57 percent in 2005, according to the Concord Coalition, which cites official estimates.

By 2030, those items will require more revenue as a percentage of gross domestic product than the government currently spends on its entire budget, according to the group, which gave Rubin its annual award for leadership on fiscal responsibility.

While ``fiscal policy can help'' support confidence in the dollar, the increase in taxes that Rubin has advocated ``doesn't seem very likely,'' said Volcker, who led the Fed from August 1979 to June 1987. He stressed the importance of monetary policy to reassure foreign investors in U.S. price stability.

``We're a little bit on the edge'' in terms of restraining consumer prices, said Volcker, who as central bank chairman brought U.S. inflation down to 3.8 percent in December 1982 from 14.8 percent in March 1980. Slowing productivity growth and rising wages mean cost pressures are ``creeping up,'' he said.

To contact the reporter on this story: Kevin Carmichael in New York at kcarmichael@bloomberg.net .

Last Updated: November 15, 2006 09:51 EST

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