Paul Volcker Explains Why The Fed Can't Raise Rates

Tyler Durden's picture

In an op-ed posted by Paul Volcker and Peter Peterson in the NYT, the two financial titans start off by pointing out just how "strange" the current presidential campaign is in its historical context...

Together, the two of us have 179 years of life experience and 13 grandchildren. We have served presidents of both parties. We have seen more campaign seasons than we care to count — but none as strange as this one. Insults, invective and pandering have been poor substitutes for serious debate about the direction in which this country is going — or should be going. And a sound and sustainable fiscal structure is a key ingredient of any viable economic policy.

... but the main issue that troubles the two financial titans, is the lack of any practical discussion of the soaring US debt during the entire bizarre campaign - the one issue both agree is the biggest challenge facing the US economy today:

Yes, this country can handle the nearly $600 billion federal deficit estimated for 2016. But the deficit has grown sharply this year, and will keep the national debt at about 75 percent of the gross domestic product, a ratio not seen since 1950, after the budget ballooned during World War II. Long-term, that continued growth, driven by our tax and spending policies, will create the most significant fiscal challenge facing our country. The widely respected Congressional Budget Office has estimated that by midcentury our debt will rise to 140 percent of G.D.P., far above that in any previous era, even in times of war.

That staggering number has been ignored by most, and certainly the Obama administration, which has been glad to take credit for a sputtering "recovery" while ignore what caused it.

Unfortunately for Obama, just last week it was revealed that none other than the chair of the Democratic Party, Donna Brazile, was "peddling fiction" when the head of the DNC admitted to John Podesta that the "people are more in despair about how things are - yes new jobs but they are low wage jobs... HOUSING is a huge issue. Most people pay half of what they make to rent.

While the reality of the recovery was set to emerge sooner or later, the US debt continues to grow, and as of Friday hit an all time high of 19,785,585,189,878.12, just $214 billion away from a nice, round $20 trillion, nearly doubling under President Obama, and worse: starting to accelerate again, despite the lack of any apparent economic crisis that demand a surge in debt issuance.


Back to the Volcker-Peterson lament, in which the two points out that "unfortunately, despite a brief discussion during the final presidential debate, neither candidate has put forward a convincing plan to restrain the growth of the national debt in the decades to come.

Throughout the campaign, Donald J. Trump has called for a combination of deep tax cuts that appear to far exceed proposed spending reductions, at the clear risk of substantially increasing the ratio of debt to G.D.P. Hillary Clinton has set out more balanced and detailed proposals, but they would still fail to stabilize and reduce our debt burden. Whoever wins, the new president will eventually face fiscal realities that force him or her to develop strategies for decreasing the national debt as a share of the economy over the long term.

Still, one can't really blame the government for continuing its debt-funded spending spree - despite protests to the contrary - after all rates are so low, it would be irrational not to take advantage and add on more debt. However, it is here that the punchline from the Volcker op-ed kicks in, and explains why the Fed is stuck and will find it next to impossible to hike rates:

Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending. There would be no room for the infrastructure programs and the defense rebuilding that today have wide support.

And there you have it: with debt continuing to soar, growing by the third highest amount on record in fiscal 2016...


...all that would take for US interest expense to spiral out of control is a spike in debt servicing costs, i.e., interest. But that's not all: US government debt is just a tiny fraction of total US liabilities and future obligations. How tiny? As the following chart from Bridgewater shows, it is less than 10% of the massive stack of US obligations that amount to well over 1,100% of GDP!

So, yes: a practical person may be forgiven for wondering just what will happen to the roughly $200 trillion in total US obligations as rates start creeping higher, especially since that "creep" is not due to actual economic growth (see the Brazile quote above and more or less every article we have written since 2009), but due to the Fed desire to once again telegraph that it believes the US recovery has arrived (as it did in December 2015 only to admit it was dead wrong half a year later).

So what happens next? Well, in a world of rising rates and soaring debt... nothing good. Back to the Op-Ed:

It’s not just federal spending that would be squeezed. The projected rise in federal deficits would compete for funds in our capital markets and far outrun the private sector’s capacity to save, to finance industry and home purchases, and to invest abroad. Instead, we’d be dependent on foreign investors’ acquiring most of our debt — making the government dependent on the “kindness of strangers” who may not be so kind as the I.O.U.s mount up.


We can’t let that happen — not if we want an America that is able to provide growth and stability at home while maintaining global leadership. We would risk returning with a vengeance to stagflation — the ugly combination of inflation and economic stagnation that we tasted in the 1970s.

Are the any solutions? Well, according to the authors, "the solutions are clear enough" - they are just unpleasant.

A realistic approach toward the major entitlement programs is required, given that they are projected to account for all of the growth of future noninterest spending. We should make gradual adjustments to the Social Security system that still maintain present benefit levels for those at or near retirement, with particular attention to those most in need. Our health care systems can be made more efficient, with better approaches toward cost control. Since health care represents 70 percent of the growth of our major entitlement programs over the next 30 years, bending the cost curve is essential to the long-term well-being of our economy.


It’s no secret that our federal tax system is broken — unfair, inefficient and prone to political manipulation. It’s filled with exclusions, deductions, exemptions and preferential rates — so-called tax expenditures — that are ripe for reform. Those policies cost about $1.5 trillion each year and disproportionately benefit the well off. Tax reform could provide better incentives for economic growth, while raising more revenue, even as the code is simplified.


But we face an immutable fact. Fair and responsible reforms will take years to implement. And businesses and individuals will need time to adjust. Delaying action now will make the needed changes only more painful and difficult later on, while also increasing the risk of financial crisis before the reforms are even made. That is why the real debate should begin immediately.


Yet at the final presidential debate, both candidates missed the opportunity to clearly lay out their visions for a fiscally responsible, long-term future for our country. There’s still time to solve this problem. But our next president needs to show leadership in the first months.

Well yes, nothing serious was touched upon in the debate, but then again the American people no longer care about serious things. Instead they are far more fascinated by whether Trump is a Putin spy, or if Hillary will revert to the TPP as soon as she becomes president and the next check from Malaysia clears.

As for Volcker and Peterson, they personally have nothing to worry about: "At our age, neither of us will personally suffer from a failure to act. It is those with long lives ahead — grandchildren and great-grandchildren — who deserve the benefit of prospering in a nation with sound finances. Take some advice from two observers who have been around for a while: The long term gets here before you know it."

Sadly, nobody ever won a US election by focuing on what is truly important, and thus painful: case in point - Ron Paul. As for the broader American population, it is about to get the president it truly deserves, be it Trump or Hillary: those who routinely ignore the important, and focus on the trivial.

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buzzsaw99's picture

fuck the bankers. they know nothing. they are criminals. congress should just print the money directly and cut those maggots out of the equation entirely. how dare they presume to lecture anyone about anything? having a bunch of grandchildren just proves they know how to fuck. we already know that much.

philipat's picture

Irrespective, the debt continues to grow at a rate of 0.5 - 1.0 $ TRILLION per year. Conclusion: rates MUST continue to decline to keep the fiat ponzi in play, so watch out for NIRP and the cashless society. Also say goodbye to pension plans and insurance at affordable rates for anything. These clowns know only one way and they will cling on to their elite positions as long as they can until the system collapses. They ain't gonna change...

Also kinda funny "Rebuild the National defence which many believe is necessary"? So even without getting into the "lost" $ 9 Trillion at the Pentagon, the US has spent on defence over the last decade more than the ROW combined, a rate of about $ 700 BILLION. One is, therefore, tempted to ask WTF happened to all that money such that we now are in urgent need of rebuilding defence? What a shit show!

Joe Davola's picture

How are Social Security and Medicare going down?  Is there a new (specially engineered) strain of influenza coming this year to wipe out a significant percentage of the elderly?

letsit's picture
letsit (not verified) Joe Davola Oct 23, 2016 7:32 PM

Do they only appoint idiots as Fed Chairs?

MalteseFalcon's picture

An appropriate comment from Volcker any time in the last 30 years could have made all the difference.

At this point any comment from Volcker is irrelevant.

And after TSHTF, he should remain silent.

Delving Eye's picture

"Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending."

Oh, puhleese, Mr. Volcker. That ain't gonna happen because the Fed will simply print however much money it needs, just as it has been doing since the crash.

Déjà view's picture

Slept Well...Counting 'Sheeple'...AAA Rated...Mr. Market Asks...How High Can You Go...

The Saint's picture
The Saint (not verified) letsit Oct 23, 2016 7:57 PM

Strangely, the wild card, inflation, received little mention from Volker.   Inflation is increasing and the only tool the fed has to restrain inflation is higher rates.  Should inflation start to run is the Fed going to raise rates and kill government spending on anything except debt service?

They can keep rates down indefinately except if inflation returns.  Inflation will be the undoing of everything and there won't be anything that the government can do to stop it.

Buy gold.  It's the only thing safe from an inflationary explosion.


NoDebt's picture

"and as of Friday hit an all time high of 19,785,585,189,878.12, just $214 billion away from a nice, round $30 trillion"

Skipped right over 20 trillion, I guess.  Who gives a shit, we'll get there soon enough.

Also I should point out (and I don't mean to be THAT guy) but the total GDP of the United States is about $18 trillion.  That would put our debt-to-GDP at over 100% RIGHT NOW, not at some point in the future.


rbg81's picture

Volker is not an idiot--he is just stating the obvious.  I've been saying this for years.  It's why the fuking "Bond Vigilantees" will never be allowed to win.

NoDebt's picture

That's correct.  The "bond vigilates" would be cutting their own throats.


NAV's picture

It's all prevaricated on war scares and war threats concocted by the financial oligarchs and MIC to get more war appropriations, to provide more handouts to Israel and to jack up taxes. It's all part of the Fed's scheme of damnable inflation to cheat people out of their pensions, fixed incomes, their insurance proceeds and savings.

As has been stated, "You don't prevent a war (wars) by starting one."

According to Kevin Gosztola on May 6, 2013, There were “74 nations where the US is fighting or ‘helping’ some force in some proxy struggle that has been deemed beneficial by the nation’s masters of war.”

MEFOBILLS's picture

Who owns the debt instruments?  
Who created them? Where are the debt instruments lodged? What is the nature of the debt?

How is it that people think that fraudulent debts should be paid back?  Is it some sort of "honor" code due to our evolution?

If it is private banker created debt instruments, then used to hypothecate new bank credit, for the most part they can be canceled.  A good rule of thumb would be 2:1.  If debt instrument creator has taken 2X from their con game of creating instruments and credit simultaneously, they have been amply rewarded at 2X returns.  Maybe less at 1.5x?  A con should not be rewarded.

If it is municiple bonds or some other debt type that was created to attract existing money, then that is another category.  They should probably be honored.  Still there are limits on the claims.

If it is debt owed to China or Saudi Arabia, then that is yet another category.  China has benefited enormously by transfering jobs and technology, ergo debt has been more than paid.  A court of law, can cancel this debt - or negotiate it away with the Chinese.  China/ Wall Street gambit is a con game. 

If it is private debts, then that means consuming and buying public cannot buy and sell from each other.  These sort of debts need to be undone.  Exogenous treasury money is a way to handle this, as people work their way out by using wages to pay off private debts.

Many bond holders and debt instrument holders are taking usury in the form of "forever" passive income.  A court of law can operate with some simple rules/laws to jubilee this sort of rent taking.  Sorry, if you are a parasite, you don't get to live on fat of others forever.

Debt instruments that grow exponentially and make demands of real economy, are outside of an economies natural ability to pay. War is usually the result of this unnatural set of conditions.  Those that benefit from con do not want sheeple waking up to their financial rent taking games.  The parasite wants to maintain its continuous suck on host's life energy.  Usurious sucking of life energy will kill the host eventually.

The Merovingian's picture

UST rates are going negative across the spectrum while we simultaneously go to war, then hyper-inflation spikes, then the whole thing collapses.

Lizardking's picture

Fed will raise rates DEC meeting 2016, bank on it. Bank stocks rising in anticipation of this move, also gold has come sharply off highs. Ignore MSM fooling you into thinking that rates will never rise or go negative. Large players have already taken positions in anticipation of DEC rate increase. Sell on the news after rate hike because following one probably won't happen until DEC 2017. First post, go zero hedge!!

trgfunds's picture

Let them go ahead and raise. You know what the result will be? LOWER rates. Better be long US treasuries and short banks. Trade of the year if I ever saw one. 

RiverRoad's picture


Fuck.  That says it all.  Fucked if they do; fucked if they don't.  This is the way the world ends:  not with a bang but a fuck.

Forgive us our debts as we forgive our debtors.  Start over.  This is too fucked up to fix without WW3.

Raging Debate's picture

Buzz - The solution is making banking in regards to the currency public and always allowing full reviews of financials which we do not have if a big portion  is swept under a rug called 'The Fed'. All that is a  fig leaf called the Fed which is a privat bank while claiming public privaladge is the biggest issue which if the public had more detail would agree.Who manages the currency manages the country. 

jmack's picture

well you told them, its  all going to be okay now, because you gave them a good and proper comments thrashing like they have never known before...

gellero's picture

Let Congress manage the fiat currency???? Like Argentina?


Uh.....not the best choice......

MEFOBILLS's picture

Argentina is continuously busted out by the tribe.  Read Perkin's book, economic hitman.  Every time you hear of an exchange rate collapse, then think (((tribe))).  They will be making their gains.

Patagonia region is Zion's back up plan.  This is why "international finance" is constantly jacking with Argentina, creating coups, and replacing leaders who are not compliant.

To this day, Israeli soldiers "vacation" in Patagonia, walking its perimeter and urinating as if marking their territory.

Congress is supposed to manage the currency - read the constitution.

Handing money power over to an unaccountable private corporation like the FED ...tell us all how that is working out?  Who are the stock owners of the FED?



knukles's picture

The Old and Fabled Crowding Out Argument which is Fallacious.
Whatever the Fed owns in Treasuries, coupons thereupon are redeemed to the US Treasury.  So no matter what rates do, the interest income goes straight from the buyer (Fed) back to the issuer (Treasury).
So see, the Fed buying Treasuries means that interest income never counts.
Watch me pull a rabbit out of my hat.

If that sounds like a ponzi, well, I sure wouldn't argue with you.  Nor is it NOT monetizing the debt, which is illegal. 
But waht laws matter anymore?
Oh, those that apply to me but not the 0.1%

Bah humbug.

Now, if the Treasury owned no US Treasury debt, that'd be a different story.

Nobodys Home's picture

So the cabal will allow an ever increasing balance sheet and never call in a marker?'

One of these days boy...we're gonna meet our maker.

Creative_Destruct's picture


"Our current debt may be manageable at a time of unprecedentedly low interest rates. But if we let our debt grow, and interest rates normalize, the interest burden alone would choke our budget and squeeze out other essential spending."

The above describes the middle of a  debt death-spiral, which, theoretically, can be put-off indefinitely by QE with the FED recirculating the coupon payments back to the treasury IF AND ONLY IF QE is perpetual and the Fed continually expands it's balance sheet AND congress continues to extend the debt limit. Both will eventually become extremely difficult to maintain. Credit-worthiness and the willingness of the worlds creditors to continue to lend become the issue, among other things.

As of now, with only rollovers of maturing instruments being performed and no new QE, the "ponzi" scheme of essentially buying our own debt has slowed. The ever increasing MASSIVE monetary creation by the FED needed to continue to buy the debt has been, up till now, comparatively harmless because the banks are holding the excess reserves to offset the crappy malinvestments that are stuck in the system from current and past bubbles, which have NOT been allowed to clear because they CANNOT be marked-to-market without revealing the entire banking system to be insolvent. This prevents the money from flowing into the real economy where it could generate inflation.

SO....we are at an impasse for now. Where this thing breaks out from here, I don't think anyone knows for sure.  But It's clear that they WILL NOT raise rates significantly (they may do a token quarter point just for "credibility" purposes). They know that everything's so highly leveraged and dependent on low rates that the system will blow if they do. By blowing bubbles, they have trapped themselves and us between the devil and the deep blue...

MEFOBILLS's picture

This is true.

The FED rebates interest it earns on treasuries....after it takes its cut, and makes sure that banks in FED system have made profits, especially FED stockholders and TBTF primary dealers.

Wright Pattman sniffed out this con from FED owners and put a stop to it, hence the rebate.

LetThemEatRand's picture

Strange that Volcker, a banker and former Fed chair, suggests that we all need to tighten our belts rather than end the Fed and require the bankers to tighten their belts (around their necks).

ejmoosa's picture

Everyone needs to tighten their belts and suffer a bit-government employees and budgets excluded.

Nobodys Home's picture

Grow a "Victory Garden!" ...The scrap metal drive is imperative to help our boys!.....Bring out your gold!

Billy Shears's picture

Infrastructure and Defense spending do NOT have wide support, I for one support neither but especially despise additional defense spending. In fact, we need to cut defense spending to support Social Security! Off topic: Are they really going to let AT&T buy TimeWarner? Please! Talk about monopoly and anti-competition; Hell NO!

knukles's picture

Laws don't apply to the elite anymore.

ejmoosa's picture

Or government officials.

Bill of Rights's picture

Granted my whole adult life I've seen and read nothing but war, but I still belive a strong country requires a strong military at all times.

LetThemEatRand's picture

There is zero danger of a foreign country invading us.  Isn't that what the military is supposed to be for?  The idea that we need a strong enough  military so we can have empire is a big part of what put us into this mess.  We could have 1/4 (probably less) of the current military and still have no threat of invasion.

A82EBA's picture

idk they couldnt stop 3 kamikaze jumbo jets over NY..oh wait

Yukon Cornholius's picture

Considering what the Russian military looks like in comparison to NATO, we are definitely getting effed in the ay.

RiverRoad's picture

Actually wouldn't mind being a little more like Denmark.  Nice little country.  Happy people.  Of course the Bush family fortune might take a hit.....

DanDaley's picture

The government has three main jobs: protect the shores, deliver the mail, and stay the hell out of my life! Oh, how far we've gone astray.

zen0's picture

But there is an invasion. Its called immigration.


The military is useless for that, and is in fact spuring it on.  How did the military prevent 9/11?


Proximity + diversity = war.




The United States of America is a third world banana republic with a tin pot dictator, and a military that cannot keep track of the money it steals by the boatloads. Moreover, the US Military has over 700 worldwide bases and $20 trillion in debt with a corrupt Federal Reserve that is so incompetent that they cannot raise Interest Rates to bail out your sorry asses from even greater failures in the new year, BillyBOY.


Buy a fucking clue, eh.

directaction's picture

After eight years of Hillary and her assorted upcoming wars and stupid distracting social spending the USA national debt will double again to 40 trillion.

At 2.5% interest alone will be one trillion per year. This is unserviceable and require even more agressive printing. 

The End Is Near, Folks. 

uhland62's picture

That sounds like you just let her do it. Is she elected dictator?

The debt is the price for the strongest military in the world, so the US can be called the most powerful country on earth. Power comes from force, forcing something on others. The debt is the price for the wars, past, present, and future. If you want to save money/debt, take the military out of the Philippines, especially Mindanao where Duterte said they are no longer welcome. Nah, can't have that, the Philippines are our friends. Indeed, friends need to be paid, nobody is friends with someone for their pretty blue eyes. If you can't afford to invite friends for dinner, the friendship fades away.  

old naughty's picture

"The end is near..."

"After eight years..."

Well, you're optimistic, no?

It doesn't take her eight years to d...d...d...

use your imagination.

cowdiddly's picture

The widely respected Congressional Budget Office

That's as far as I got.

Jimmy Jimmereeno's picture

In the same paragraph but preceding that statement, there is either a gross typographical error or the authors need to get a knowledgeable editor:

The total public debt as a percentage of GDP was at 105 in theQ2 of this year, not the 75% that is stated (see:

Paul Volcker may have contributed much of his life to gov't service but he is hardly a "financial titan",

cowdiddly's picture

That moron moderater at the 3rd debate tried to shoot out that 75% malarky in a question to Trump too that went unnoticed by most. I just laughed. I guess that will be the new propaganda line.

Volker was no guru for sure but they claim he is like the rest of this long line of imbeciles. He about killed a nice economy clean off. Killed construction dead. Construction guys were mailing the idiot  2 x4 blocks, he recieved thousands of them. He jacked interest up to 18% and I think it reached as high as 21%. Families that had to buy a house got screwed bad and paid dearly. You guys cant imagine buying a 30yr mortgage at 18-19% now but thats what happened with this hero claiming he was fighting overheating. Yea you figure the daily compounded interest on that payment and see how much goes to priciple every month, pffft banks robbery in broad daylight, same as always. People don't remember but everyone including me hated him worse than Benarke if thats even possible.

But he is right  in this article and bout ten years too late of course so the banks can screw you to death going the other way. boom bust cycles the FED themselves make..same as always

brown_hornet's picture

Yeah Cow, but a house that is now about 300K could have been had then for about 55K

whatamaroon's picture

That was also during the good ole days when you could get a 1 yr CD that paid 10% interest.

Theta_Burn's picture

The 10 trillion dollar mulatto.. that some accomplishment for someone who has accomplished absolutely nothing their entire life.

I suppose its off to some far away land to rape, pillage, and burn just to pay the bills...oh, and treasuries, get your treasuries Heeere.