Volcker fears loss of economic control

Press, 13 May 1987, Page 43

Volcker fears loss of economic control

NZPA-Reuter Atlanta Recent wide swings in interest rates and' the value of the American dollar suggested that the United States was in danger of losing control over its economic destiny, the chairman of the Federal Reserve Board, Mr Paul Volcker, said yesterday. “All that volatility in exchange rates and interest rates in recent weeks gives a little taste of how vulnerable our own financial markets and our economy have become to what other people think,” he told graduates of Atlanta's Emory University.

“We are rather obviously in danger of losing control over our own economic destiny,” Mr Volcker said.

The dollar has gyrated in recent weeks as the • market has reacted to intervention by Japan and West Germany, which have been trying to push it higher, and a suspicion that the Reagan Administration wants it lower to help reduce the U.S. trade deficit.

The bond market, worried about the willingness of foreign investors to keep buying dollars,

has mirrored the dollar’s swings, prices of U.S. Treasury bonds moving up and down sharply in the last few weeks, sometimes in the same day. Mr Volcker said that criticism of Japanese trade relations with the United States was largely misplaced as long as the United States could not get its economic house in order.

He noted that Japan had repeatedly been the target of American criticism “about its enormous trade surplus with us, about its protectionist tendencies, about its unwillingness to provide enough aid or spend enough for defence — or whatever the latest complaint is.” But, Mr Volcker said, “We have to remember, too, that it’s not guile or sharp trading practices that fundamentally built that (Japanese) economy and that have made its currency so strong.” Economists have emphasised that the huge American trade gap is indirectly caused by the Federal Budget deficit. This has helped fuel the pace of the economy, thereby increasing im-

ports, while domestic demand remains sluggish abroad. Also contributing to the problem is the low level of savings by Americans in comparison with European countries and Japan.

Mr Volcker also said the recent insider trading and Government scandals had raised deeper issues about the way America did business.

“The effective operation of an economic system, in the last analysis, rests ,on a strong sense of business integrity and fiduciary responsibility,” he 1 said.

“And, even if it sometimes gets frayed around the edges, that same sense of integrity and trust must underlie any system of self-government,” he said.