i think neither of those things is true. i don't think the people in iran know what's going to happen. if you're beating man, and i'm not, reverend, you would say the guys with the guns normally hold on to power, and you would say but they are unpopular. i can think of lots of regimes that exist for many years despite their unpopularity. that is not a necessary thing. i think there is great uncertainty for what is going to happen. let's back off a little and take a breath or a pause because it is very unclear what the right thing to do is when no one knows what's going on and sometimes prudence is the best course but i very much appreciate it. . .

>> now we're going to ask for questions. name first, your questions, and then you sit down. next person, name, question, sit down, name, question. and then we will give our

closing comments and we will share the cookies and goodies. >> i'm veronica lowell and i'm a representative here from pots christy u.s.a., part of peace movement. i would ask our remaining presidents here to flip the question over. you've been encouraging that we -- that there's sometimes we need a little patience to step back, that negotiation -- what are you going to say to the american people and to your congress who are the fear level is so high and the lack of information that people immediately want an aggressive action? how will you get a buy into your policy?

>> i'm really happy to see my old friends from philly here. so anyway, my comments have to do more as conflict analysis. -- analyst. article 4 is a trap for nuclear power, which i also coined as toxic radioactive power has as long as we have that -- i'm also actually -- thanks to susan campbell, i'm on the global council and work with m.g.o.'s on presentations on delegates and we're addressing that. the international global arena to replace nuclear power and it was mentioned that possession of nuclear is a status symbol and a

symbol of national pride and also the more we try to punish them, the more we're going to want them, i think. so according to the law of opposites, that the law it takes to pressure them have the exact opposite. in one case of -- a study of 100 case, they failed 86 times. >> and your question is? >> i think we need to use more strategies of positive inducement security assurances but it's kind of against our psyche now that we have to threaten them and crippling and punishing perform >> conflict transformation. >> i'm here from philadelphia with the sinces for global solutions, i'm susan mcbride. my question may be very naive. how about if we just recognized iran like kissinger and nixon did after 30-some years of just

not talking to china and in terms of stepping back. you think about marshal, at you have to step back. step back in terms of conflict and go ahead do people to people. i like dr. walsh in saying giving them time and space. it feels like over the last 50 years, we've been so confrontational with iran that i was hoping with obama, that we would actually do more people to people, do less of this rattling and it feels to me that we're back there. recognize them. not have to go to the u.n. all the time. >> thank you. and thank everyone for your questions and comments. i'm going to ask our panelists that are remaining here to give their closing comments on any of these questions and i have a closing word and we will be adjourned. craig, why don't you go first. >> i think we need to very much

intensify the diplomatic relations with iran and i think that means recognition. i think what you want to do is establish a basic a dialogue and you cannot do this unless you're talking with a recognized sovereign state. i think that's essential. and you don't have to agree with the sovereign states, you can basically oppose their policy. you can invoke sanctions but i think you need full diplomatic relations and i think if you have that, you create a level of confidence between the twoçó countries which has peaceful effects. >> it's important that we be able to show progress moving towards success will hold off

desire to do things that might be, you know, dramatic but dangerous. and we need to also make the argument that we're working in a coalition of nations that all have to share similar goals with iran and i think that will hold off the more extreme calls from congress reaction. question about recognizing iran. part of the problem is to be honest, you know, the iranians have done everything they possibly can to give them everything possible to give them the benefit of doubt. it's hard to know, given the particular history of the united states and iran how at this moment it's going to be in the cards because anything we do will appear to be rewarding them even if it isn't our best interest. i don't see it happening at this time. >> jim? >> veronica, you asked about people want action and, you

know, and i feel this. they want answers. they want to be able do something. bad things are happening and they want to be able to do something. we're americans. we're the can-do people. we want to do something. but sometimes it's better to be smart than reactive. sometimes you wait for your moment before you do something. and that improves your chance of being able to be successful. now, of course, that's politically difficult. and i think obama's shown great resolve in how he managed that whole process of the 6/12 election and still was quietly, secretly negotiating with his european allies, that teheran research deal. and the deal's fallen apart and he's going to take some hits for that. that's what presidential leadership is about. you got to explain to people that smart is better than reactive. on the pregnant, diean, i hear what you're saying but i think

also to be -- we have to be truthful about it and say sometimes when you pressure people, they withdraw, react, and tcharing heels in. part of my problem with the sanctions is if we just did it quietly and let it takes it effect and the government saw its rurblingts then they would be able to respond. but we have to shove it in their face and call them out on it. so they feel if they do anything that's positive, they're criticized on the teheran research deal because they were his heart line and his reformist critics say he's giving into the pressure.

so i'm not generically against pressure, but i think we should be smart about the way we do it and not force people into a corner where their only option is to defiantly strike back. and on susan's point on recognizing iran, you know, i think if things move in a positive direction at some point today, a year, whatever, from now, that's going to be part of the process, that recognition, it will be part of the negotiation and discussion process and a movement towards normalized -- iran doesn't want to do it tomorrow. the current government has a lot invested on us being the bad guy and the west and the imperialist and all of that. part of -- they are revolutionary government after all. part of their identity, vis-a-vis their government, it opposes the west. so you get a lot of that

rhetoric. they're not necessarily ready to jump in right now either. so what you need to do is take those steps over time if the opportunity presents itself and it may not and if it does and we're ready for it and act wisely, then you start a process where each side who has grievances and rightly mistrust the side. we're going to get out of it. it's about building trust and confidence and some momentum that would culminate in some of these things that we're talking about. >> thank you and thank you to our panelists. i wear this pin often. actually, every day. it's a peace dove on a planet earth on a green ribbon. there's only one of them and it's here. toss address fear, fundamentalism and fox news with a commitment to peace, poverty, and planet earth. i think that one of the problems

we face here in the united states is fear. and lack of understanding in information. and with forums like these are helpful spread the word but it's like tainted money. taint enough in a sense of educating the general public. my hope would be that all across the united states, we would have conversations about iran. and we would have conversations about nuclear proliferation and that we would encourage people who aren't here on an afternoon to think about these issues to actually dig deeper and get a sense of the texture of these issues. i'm reminded of an african proverb. if you want to walk fast, walk alone. if you want to walk far, walk together. we need to build a constituency across the country that understands that there's no defense or military use for nuclear weapons. so let's get away from that fear

and move to a strategy where we have less nuclear proliferation. and in fact, since world war ii, our conventional weapon have become equally terrible and the terrorists, they don't mind us building more nuclear weapons and more aircraft care yemplets it doesn't scare them at all. we really ought to think differently about how we deal with the dynamics of our planet. and secondly, we got to figure that we live as brothers and sister on this fragile planet earth. when i was born, there was a little over two billion people. there are now 6.6 billion of us. we are the leaders that we've been waiting for. don't wait for congress. don't wait for the house or the senate. don't even wait for a popular president to do the right thing. we've got to recognize this is a

people-to-people effort that's got to grow from the bottom up. it's great if the top down works but it's got to grow by educating as many people across the country as you can. you've ban great audience. my colleagues here have one final benediction. >> one final thank you, actually. i want to thank bob edgar who has not yet been thanked in this whole wonderful -- and this whole wonderful panel. [applause] for a great -- and bob said you know, this is conversation that has to be held around the country. well, that's what the project nuclear awareness is about, it's about holding these conversations. so i just want to thank the other people here who help us to do that. kim, if you would raise your hand or stand. is in the front here. couple is the head of the youth project for p.n.a. she is web casting this as we speak so that

youths all over the country is watching it. c-span is also here and voice of america. and then finally, where is ian? ian ramsey is our director for development. and these conversation could not happen without them. so thanks for coming and please join us for cookies and coffee. >> consider yourself twittered. [applause] >> "washington journal" starts at the top of the hour.

>> this morning, president obama delivers remarks on the economy on the one-year anniversary of the signing of the economic stimulus bill. live coverage begins at 10:25 a.m. eastern. later in the day, from the national archives, a panel discussion on the achievements of the tuskegee airmen. live coverage begins at 7:00 p.m. eastern. >> the peterson pw commission is holding a budget on reform. >> i'm a practicing roman catholic. so the answer to the question is do we need a fiscal goal is the answer to the following question. is the pope catholic?

the answer is yes. we don't just need a fiscal goal, frankly, we need a strategic plan. this country has been in existence in 1789 and it's never had a strategic planning framework that is future focused and results oriented and we need key outcome. social, environmental, to help understand how are we doing on an outcome basis? are we getting better or worse and very importantly, how do we compare to our peer group? >> a great nation does not stay great by being a below average on a number of key leading indicators that help determine

whether or not the future is going to be better than the past. in my vu,e we are at a critical crossroads in the history of the united states and the decisions that are made or that fail to be made within less than five years will largely determine whether the future for this country and our families will be better than the past. ones that are made and ones that fail to be made within the next five years will determine our history in large part. the problem is not solely spending. that is definitely true. but the problem is primarily spending in many regards. george w. bush was the biggest spending president since lyndon baines johnson. he also expanded entitlement belt. first one to do so in a major way since president baines johnson and president obama as significantly increased discretionary spending based on

the two appropriation bills that he signed. there's a great debate about the size and role of government. but returning to spending, there's some very simple principles. habitually spending more money than you make is irresponsible. irresponsiblebly spending somebody else's money is on ethical and if you're a phew furebry, a few deutschery breach. and irresponsible spending someone else's money when the person's who's money you're spending are too long to vote and not born yet is immoral and all three of these things are going on now. it depends on whether or not they are going to be recurring in nature. for example, in fairness to president obama, he inherited a

$1.2 trillion deficit. due to recession. declare unfinanced wars and a variety of other actions. and it's understandable to have large deficits when you have a regulation -- recession and dealing with housing and financial services that require some action. that's not what threatens our ship of state. what threatens the ship of state are the large known and growing structural deficits that will be with us once the economy returns to growth, once unemployment levels are down, and once the undeclared wars are over. when those three things happen, we face large known and growing structural deficits that threaten our collective future. and we need to do something about them. and it's not just the issue of the deficits. it's the composition of the budget. when you look at the nature of

the budget, it's changed in profound ways. today, less than 40% of the federal budget is discretionary. meaning that the congress gets to decide how to spend the money each year. and if you look at the constitution of the united states, you'll find that every express and enumerated responsible envisioned by the founding as far as for the federal government is in discretionary spending. squeezed. and don't get me wrong. there's plnt of ways in defense and there's plenty of ways in homeland security. but the fact is what the founders envisioned is becoming a smaller and smaller part of the federal government. and something needs to be done about that. we have to recognize that within 12 years without an increase in interest rates, that the single largest line the federal budget is expected to be interest on the federal debt. and let me repeat. without an increase in interest

rates which is totally unrealistic. and what do we get for interest on the federal debt? nothing, nada, shinola, as we say in the south. absolutely nothing. and he's the path that we're on. so it's not just deficits. it's debt. and you know, quite frankly, we've been engage nag number of creative accounting and self-dealing practices for a long time. they finally caught up to greece. also greece has got somebody to bail them out. we don't. if you look at our creative accounting practices, we've had creativing accounting with a trust fund for a long time. in washington, they use words that mean the same thing as webster's dictionary. like trust fund. you can't trust them. they're not funded. like cuts. it means reduce the rate of increase rather than an absolute rate of reduction.

no wonder the american people have such low confidence and no wonder that our representatives have so little credibility with the american people. we need to speak plain english and talk straighting to the american people. so if we look at our situation, we see that if we actually were accounting for the trust frunds properly, our deficits would be larger than advertised, and our debt is larger than advertised. we owe social security and medicare trillions of dollars in debt. we will not default on that. but we don't want to call that a liability. so therefore, our debt-to-g.d.p. ratios only represent public debt rather than total debt. if you look at total debt, we are over 95% of g.d.p. by the end of this year and heading up. we will not default on that trust fund debt.

so we need to recognize that we have to be more truthful with regard with how we account for things and the real challenge frankly is the fact that it's our off balance sheet obligations. $38 trillion for medicare alone. $7 trillion for social security. seven to eight manageable. it's not that difficult to solve that problem. and these numbers don't count. the federal reserve. they don't count the government responsibilities. those are the latest self-dealing practices. we own the american people a significant majority of the government sponsored identities and yet they're not being consolidated the financial statement of the u.s. the fed is engaging in a number of different types of practices because the congress and the president neither couldn't or wouldn't and as a result -- its balance sheet is doubled to tripled and it's buying a tremendous amount of u.s. debt which serves to hold down interest rates in the short term.

you can have a short-term impact on interest rate. you cannot change market forces indefinitely. so the fact of the matter is new and larger frankly self-dealing practices and creative accounting practices have dom the forward within the last year or so and they are extremely troubling. dependency. the united states has become increasingly and prudently dependent on farm lenders to finance our deficits and debts. we are fortunate that china, japan, and all exporting nations have been willing to lend us significant sums of money at low interest rates but it is prudent to rely upon that. it is in our security security or tranquility interest. you must pay attention your farm len demplets they have already spoken. the reason that all taxpayers in america guarantee $5 trillion in

fannie mae and freddie mac debt is because japan and china demand it. while interest rates haven't gone up yet, the actions of our foreign lenders speak loudly. they are reducing their appetite for our debt. they are buying shorter term maturity. the durations of their obligations are going down. they're looking for commodities and other alternative investments. they're looking for inflation tips because the factors say that inflation will go up over time and that will compound our problems. we must recognize that there are four key parallels between the factors that cause the mortgage-related subprime crisis and the federal government's own deteriorating finances. a disconnect between who benefited prealing policies from practices and who paid the rice and bore the burden when the bubble burst. a lack of transparency is the magnitude of the real ring.

too much debt. not enough focus on cash flow and overreliance on cash rating and a failure of both corporate and government oversight, risk management and regulatory functions who act until there was a crisis at the doorstep. there are two big differences. first, the size, the scope, and the potential adverse consequences of a meltdown in the federal government's finances and a meltdown would be simply a loss of confidence and our ability to put our federal financial house in order. and second, nobody's going to bail out america. we have to make tough choices. and we need to begin that process very soon and before we pass a tipping point.

the good news is america gets it. 80% of americans believe that escalating deficits and debts and increased farm lender should be a top priority exceeded only by the economy and jobs. way ahead of health care, climate exchange other important issues. secondly, two thirds believe that washington is not paying enough attention and 70% support a fiscal commission where everything is on the table to try to help deal with the problem. there's no question that it will take an extraordinary process because the regular process is broken and the decision by senator bind not to run for re-election is a troubling indicator of just how broken it is. as long -- as well as decisions by other senators, you know, such as senator gregg, et cetera, these people are promoting fiscal responsibility. these people are focusing on the

future and they are disgusted not just with partisanship, but the ideological divide and the stalemate that we face. it's one thing to have a stalemate in washington when things are going well. because after all, government can and listen to me carefully, muck things up. that started with an m. but when things aren't going well and when they're deteriorating with the passage of time, having the stalemate is a disaster. and that's where we are right now. so i want to commend president obama for recognizing the problem. his steps with regard to fiscal 2011 budget were modest. they were modest with regard to the short term. they did not have the type of really, goals that we really need to see but i do want to commend him for recognizing that we need a fiscal commission. it's sad but we had seven profiles encaving, in congress

when seven sponsors of the conrad gregg bill didn't vote for it when it came up for a vote in conjunction of raising the debt ceiling. but the simple fact is having a presidential commission is better than having none. but there are key factors. the scope. everything has to be on the table. secondly, the role. it must educate and engage american since beyond the beltway on the truth, the tough choices, the prudence of act sooner rather than later, and the potential consequences of educating our families if we do not. and it must set goals and the goals of just 2015 deficit-to-g.d.p. in my opinion is not enough. we need a debt-to-g.d.p. ratio

for a longer term which is what the commission recommended and we need to make meaningful progress on reducing the tense of trillions of dollars of unbalanced sheet obligation. so a triple goal for any type of fiscal commission. for membership, they need to have capable, credible, and committed people who are not only capable and credible in washington, but in the real world outside of washington's beltway because right now, that's a real problem. and thirdly, i mean, with regard to committed, they have to be committed to come up with non-partisan solutions that can achieve bipartisan support and they have to be willing to spend the amount of time that will be necessary to accomplish all these objectives. obviously, the end result, recommendations, that should be acted on by the congress. timing. this year is the year to engage the american people with the facts, the truth, and the tough choices. as well as other interest

groups. and to ultimately set the table for a tough vote either in 2011 or, you know, or late this year, although i think there's clear controversy having a lame duck congress address an issue as difficult as this. in summary, we are a great nation. arguably the greatest in the history of mankind. you know, if greece was the cradle of democracy, greece was a great, great civilization. greece was once great too. and we need to learn from history, not just greece, which is in the news today, but think about the roman empire. it fell for a number of reasons. decline in moral values and political civility at home. overconfident and overextend militarily around the world, and

fiscal irresponsibility by the central government. if those sound familiar, it's time to wake up and start putting processes in place to make tough choices and before the we pass the thing point. we must learn the lessons from history and act before a crisis is at our doorstep. and to began, i look forward to what president obama have to say about this commission and i'm hopeful that political parties won't play politics with it and i think if they do, they just might be punished at the polls because in my view, what happened in massachusetts was not a victory for republicans, it was a rise of independence. it was discussed with a status quo. it was a desire for real action. and it was a calling for washington to become more connected with america. i know we can. i know we must. i hope that we will make tough

choice sooner rather than later. and if we do, our future can be better than our past. and if we do, the american dream will stay alive. and to me, that's the only option that we should be pursuing. thank you very much. [applause] >> more now from the peterson-pew forum on the budget. we will hear from the federal reserve bank of the committee. >> i am definitely outside the beltway. kansas city is smack dab in the center of the united states. and in many ways, it is very central in itsing. it has a broad base of individuals, conservative, liberal, and it does give you a very important prism on the world. and prism on how people see washington and what is going on there.

it is a real delight for me to be here and it brings a perspective to the open market committee meetings that i do participate in. >> we are moving into an era where the government finance is finally taking center stage, at least that's my observation. fiscal majors taken to bring the economy out of the recession mounting longer term issues around social security and medicare and other growing demands put on the federal government have invited a massive build-up of debt, both now and as far as the eye can see. the congressional budget office projections have the federal debt reaching unsustainable level, somewhere between two and five times our national income within the next 50 years, which

leads us to the unescapeable solution that i've heard today, that u.s. fiscal policy must focus on reducing the debt buildup and avoid the consequences of not doing so. so in managing our nation's debt, there's three strikes, anyway. there's three options forward that i've heard defined here today. first, the worst choice of our -- in terms of our long-term stability but perhaps the easiest in terms of short-term political option is that we can knock on the central bank's door and request i or demand that it print money to buy the swelling amounts of public debt. or secondly, perhaps more tolerable politically but still, i think all damaging to our economy. we can do nothing. so long as the domestic and foreign markets are willing to fund our borrowing needs at

probably and inevitably at higher interest rates. or third, the most difficult, and probably the least palatable politically, we can act now to implement programs to reduce spending and increase revenues to more sustainable levels and far as our deficit and our debt look. and this last option involve some pretty hard choices. however, in my view, it is as others have said, the responsible path to sustainable growth and the alternative options inevitably lead to financial crisis and greater long run sources in our national coincidental and wealth of this nation. the question of what combination of spending the country might chews is the purview of the congress and the executive branch.

it is a fact that the current outlook for fiscal policy poses i think a real threat to the federal reserve's ability to achieve its dual mandates of fries stability and maximum sustainable long-term growth and therefore is a threat to its independence as well. the founders of the federal reserve i think understood this conflict. they understood that placing the printing press was a formula for financial disaster. they design our bank for stable prices and long-term growth, emphasis on long-term and they gave it a degree of independence so it could carry out this mandate. the goal of policy cannot be just to get through the current challenge. but rather to rebuild a foundation of a stable and

prosperous economy. looking at our long run future. it's in this context that i appreciate and welcome the opportunity to address our fiscal scommadges the impact on policy. throughout history, there are many examples of severe fiscal strain leading to major inflation. it seems inevitable that a government turns to its central bank to bridge budget shortfalls with the result of being too rapid money creation follows and not immediately, that's one of the elements of it. but eventually to higher inflation. such outcomes require either a cooperative central bank or an infringement on its independence. while many perhaps most nations assert the importance and benefits of an independent central bank, the fact is when pressures mount, the immediate overwhelms the long-term goals

and the independence becomes an expedient to be foregone. now german inflation is one classic cited example with good reason. when i first became the federal reserve bank of kansas city in 1991, my 85-year-old neighbor gave me a 500,000 mark german note. he had been in germany during the hyperinflation. and he told me that in 1921, that note he thought would buy a pretty good home, in 1923, it wouldn't buy a loaf of bread. and he said to me and i'll never forget it. i want to you have this note as a reminder. your duty is to protect the value of the currency. and the note is framed and hangs in my office till this day. someone recently said about my comments on hyperinflation that it evoked it for effect. many say it cannot happen in the

united states, far too sophisticated and to them, i ask would anyone have believed three years ago it would be possible that the federal reserve banks would have one and a quarter trillion quarters of mortgage-backed security today? i think not. i ask your indulgence at the unthinkable becomes possible when in an economy is under severe stress. now if german hyperinflation seems an unrealistic example from the distant past, let's come forward a little bill. many have voted in the 1960's and it's noted here today. the federal reserve's willingness to accommodate fiscal demands and help finance the expending for the great society and vietnam war contributed to a period of accelerating price increases. although the federal reserve was a elective participant, it accepted the view that monetary policy should work in the same direction as administration's

goals and help finance at least part of the spending programs. monetary policy accommodation during this period contributed to an increase in inflation from 1.5% in 1965 to 6% in 1970. and it also helped in my view, to stage ourselves for the great inflation of the 1970's as inflation expectations eventually became unanchored. last friday and it was mentioned again today, i read that an economist from the i.m.f. raised the question of whether the central target a higher inflation to around 6%. while this may sound like a reasonable theory from a credible economist, my concern is that it is the process of rationalizing solution that too long and often have effects on our policy paths going forward that can be and usually are harmful.

today, the united states is benefiting from the policies that we're establish -- were established in the 1980's to end the great inflation. confidence of the federal reserve's commitment to price stability have kept demands for treasuries relatively strong allowing the government to borrow at low interest rates. from since here and of around the world. but i think it would be a mistake to take this current ability for granted and do nothing to address the mounting debt. while the last 30 years have been relatively stable, at least until recently, our long-term history with debt is less reassuring. from world war ii to the president phenomenal, federal debt held by the public has increased over 30fold and supported by the money supply and the price increased by 12.

that's a huge increase and it represents the significant reduction and purchasing power of the dollar over time. these are matter that demand our attention and its demands that it places on monetary policy. the immediate concern is the size of the deficit. the c.b.o. projects the deficit is 12% of g.d.p. in fiscal 2009 will be 8% this fiscal year. these are extraordinarily high levels by any standard. in the entire history of the united states, the government has run differences -- deficits over 10% of g.d.p. and usually during only the immediate period of a war or following it. as troubling as these deficits appear, even more decides kettering is longer term outlook is caused by the accumulation of

these deficits over time. the c.b.o.'s long-term projections show that the fiscal policies are unsustainable. we've all heard that. and in one scenario, the liftoff point for federal debt, that is the time when debts starts rising without sign of stabilizing occurs shortly after 2020, and by 2035, federal debt held by the public reaches 80% of our gross domestic product. a level exceeding just world war ii. the liftoff in debt has only begun. or i should say has already begun. with federal debt held by the public reaching 181% of g.d.p. in 20 easily exceeding the peak of that ratio 113% at the end of world war ii. so a key part of the problem stems from rapid growth and in

time, more spending. including spending on social security and medicare. over the next 30 years, government accounting office has estimated that the present value of future expenditures on all social insurance programs exceeds future revenue by over $50 trillion. that is nearly four times the size of our g.d.p. and it is clearly unsustainable. adding to my concerns though for the nation's economic prospects is the current level of private indebtedness. with government debt in the united states, private non-financial debt has grown steadily over the post-world war period from 40% of g.d.p. in 1945 to 175% in 2009. every consumer in business that is a net borrower would benefit from lower interest rates and just as noteworthy, it should be -- should not escape our notice

that rising inflation would trim the real value of their indebtedness. thus, high price indebtedness will contribute to pressure of the federal reserve to inflate. now, the past forward. if i could return in a stones my opening comments, i do see just three ways forward in dealing with this current and pro-perspective fiscal inbalance. while each involves pain, only the third in my opinion resolve the inbalances without eventually causing inflation to accelerate and precipitating a financial and economic crisis. the first option for dealing with this inbalance is for the central bank to succumb for the federal pressure and monetize the debt. as debt levels within the country rise, relative to national income, interest rates will tend to rise as well.

in this instance, the central bank is pressured to keep rates low and encouraged or required to assist the market in facilitating the debts the government's funding needs. if the central banks succumbs the balance sheet will expand and the money supply will increase. this is welcome at first but if it goes on unchecked, the outcome is almost always higher levels of inflation and immediately ultimately a loss of confidence in the value of the currency and the economy. at that moment, governments and their sinces are forced to make

painful adjustments. an example of debt is currently being played out not just in greece, but in argentina. the president of argentina central bank was recently forced to resign because he would not transfer reserves held by the central bank to repay certain government debt. inflation in argentina is currently running 8% and i'm willing to bet it's going to go higher. now the second path is what i call stalemate between the fiscal and monetary authorities. and such a stalemate, the fiscal imbalance grows while the central bank maintains its focus on price stability. although the u.s. government is currently privileged to borrow at favorable rates the fiscal outlook would undermine this privilege adding risk premium

and the price of its debt in terms of interest rates would increase. also as a government competes for the private borrowers for funds as the economy improves, the potential exist for the fiscal imbalance to drive up real cost of capital as a private sec -- sector. this high cost of borrowing weakens the economic growth prospects and undermines confidence in the copy's long run potential. slowly, but inevitably, if the fiscal debt goes unaddressed, the currency weakens as does access to global financial markets and the cycle worsens leading ultimately to a financial and economic crisis. to me, an interesting example in this respect is canada in the first half of the 1990's. during this period, canadian

increased from about 55% of g.d.p. to roughly 70%. at the same time following a joint agreement between the government and the bank of canada, the bank targeted a steady downward path of inflation from 3% to 2% at the end of 1995. but no monetary accommodation from the central bank, unsustainable government deficit and debt cause real rates to rise while canadian inflation was below that of the united states throughout this period. canadians paid a substantial risk of premium over the u.s. to borrow. it came under persistent pressure and economic performance suffered with g.d.p. growing very sluggishly in the recovery from 1991 recession and unemployment climbed to eventually 12%. these economic conditions contributed to election of a new

government, which made it credible to balance the budget as maya has outlined in the following yearing the deficit fell dramatically. revenues did increase and government expenditures were cut sharply. by 1996, canadian interest rates have fallen below comparable u.s. rates. inflation remains subdued. real g.d.p. growth picked up. and unemployment fell. so that brings us to the third. and the canadian experience in the second half of the 1990's is suggestive of the benefits of the third. it is the only responsible way to resolve our growing fiscal inbalance by dreags its source in an environment of price stability, all seem to agree this is the way we would go but that is always -- the devil is always in the details. it requires an institutional

framework committed to having an independent central bank with a requirement to pursue price stability. this discourages the fiscal authority from turning to its central scombank should it do so, it strengthens that bank's stability to say no. in the united states, the federal reserve's policies in the early 1980's provide i think a good vivid example of the benefits that arise from the exercise of this independent authority. during this time, high interest rate policies designed to lower the inflation were deeply unpopular. both among the elected officials and the broad public. but the federal reserve was able to exercise its independence and pursue a long-term goal which systemically reduced inflation which changed the psychology of the nation regarding its expectations about the inflation path. as a result, the united states has had nearly three decades of relatively low inflation. knowing inflation is not an

acceptable alternative to strong fiscal management, the government faced with death rising levels must provide long-term plans to establish fiscal balance. the plan must be clear, have the force of law, and its progress so as to reassure markets but also the public that the country has the will and the ability to repay its debts in a stable currency. to be broadly accepted, the plan must be seen as fair, in which there is a sense of shared sacrifice across all segments of the economy. without being specific, these requirements suggest an approach in which we are willing to disappoint a host of special interests. it means for example, controlling budget earmarks not because they're going to make a huge difference but because we need to establish trust. we need to trim subsidies to

numerous economic sectors. and we must resolve the banking problems and the perception of wall street is favored over main street. all of which would otherwise foster mistrust and cynicism among the public and i think that's a big part of the backlash that's going on now. leaving these issues unaddressed would undermine the popular support required for the tough decisions needed to bring our federal budget into balance. finally, there are no shortcuts. we currently must adjust from a misallocation of resources. that's why this recession is so tough. there's no way to avoid some short-term pain in fixing the fundamentals of our economy. it is invent for the election cycle, certainly, and it is undeniably terrible to have 10% of our labor force out of work. but shortcuts now mean people out of work again in only a few

years because we begin try and avoid the difficult adjustments. they're inevitable. outlining a credible course for managing our debt now and into the future will i think accelerate the restoration of confidence in our economy and contribute importantly to sustainable capital, investment and job growth. as i mentioned in the beginning, the fiscal projections for the united states are so stunning that one way or another reform will occur. fiscal policy is on an unsustainable course. the u.s. government must make adjustments in its spending and its tax programs. it is that simple. if preemptive corrective action is not taken regarding the fiscal outlook, then the united states risk precip taking it its own next crisis. eventually, government budgets that are severely out of balance

are an inevitably resmed either by force of the markets or preferably by choice. and nations must experience a profound crisis to focus the government's attention on taking the corrective action. usually it is at this point that the governments establish fiscal discipline, renew their commitment to the central bank and begin to do the cuts there at necessary. ironically, these generally are precisely the reforms that would have prevented the crisis in the first place. the only difference between countries that experience fiscal crisis and those that don't is the foresight to take the corrective action before circumstances and markets harshly impose upon them. fiscal reforms must occur in the united states. and i want to make a couple of comments in terms of this thought of the word populism and

words like that. it's really about the center, the middle class who are looking for these reforms. and if you give them the confidence, it will be shared broadly, from my experiences in the midwest, they will follow that lead. but they have to have the assurances. and i much prefer that. i much prefer a credible plan. i much prefer the time it takes to explain that to the center than i look forward to the otherwise irresistible impulse of the government to come knocking at this central bank's door. thank you very much, ladies and gentlemen. [applause] >> with your wildest imagination, if you were writing fiction, you could not make the story up. >> this weekend, ken gormley on "the death of american virtue, clinton vs. starr."

>> "washington journal" is next. we'll take your calls. this plorning the white house, president obama delivers remarks on the economy on the one-year anniversary of the signing of the economic stimulus bill. live coverage at 10:25 eastern. and later in the day, from the national archives, a panel discussion on the achievements of the cuss give airmen, the african-american military airmen who threw during world war ii. live coverage begins at 7:00 p.m. eastern. [captions copyright national cable satellite corp. 2010] captioned by the national captioning institute --www.ncicap.org--.no carrier