Volcker Says Nations May Face Prolonged Unemployment

By Alexandre Deslongchamps -

Paul Volcker, former chairman of the U.S. Federal Reserve. Photographer: Tim Boyle/Bloomberg

Former Federal Reserve Chairman Paul Volcker, an adviser to President Barack Obama, said he doesn’t expect consumer spending to spur growth, and the U.S. and other developed nations face the prospect of protracted joblessness.

“This has not been an ordinary recession,” Volcker, 83, said today in a speech in Toronto. It’s “very difficult to find a sector in the American economy that has any spark to it,” he said.

Developed nations may undergo “prolonged unemployment,” he said. “It’s going to take years to turn it around,” presenting an “enormous political challenge for all leaders.”

U.S. companies unexpectedly cut jobs last month as employment decreased by 39,000, the biggest drop since January, after a revised 10,000 rise in August, according to figures from ADP Employer Services. A loss of jobs raises the risk that consumer spending, the largest part of the U.S. economy, will retrench and halt the recovery.

Unemployment, public debt and fragile banking systems pose risks to global prosperity, the International Monetary Fund said today, urging policy makers to take bolder steps to assure a sustained recovery.

The world economy will expand 4.2 percent next year, the Washington-based IMF said in a report, down from its forecast of 4.3 percent three months ago. The fund projects growth of 4.8 percent this year, up from 4.6 percent.

Big Adjustments Needed

The U.S. has “very large adjustments” to make in the economy, including increasing exports and cutting the current- account deficit, Volcker said. “It will take years.”

U.S. Treasury Secretary Timothy F. Geithner said today a “damaging dynamic” of large economies keeping their currencies undervalued can cause inflation and asset bubbles, and called on countries to coordinate their policies.

Global exchange-rate policies are a source of contention ahead of this week’s meeting in Washington of the International Monetary Fund, World Bank and Group of 20 officials. Brazil’s Finance Minister Guido Mantega last week warned of a “currency war.”

Referring to the yuan-dollar exchange rate, Volcker said, the U.S. allowed “the imbalance to go on and on and on, to the point where the Chinese are stuck with dollars and we’re stuck with indebtedness.”

“This is so fundamental, you’re not going to cure it by exchange rate intervention alone,” he said.

Volcker is chairman of the president’s Economic Recovery Advisory Board. As Fed chairman from 1979 to 1987, he raised interest rates to as high as 20 percent to tame inflation, triggering a recession.