AS CONGRESS cheerlessly took up the president's budget yesterday, the Joint Economic Committee asked Paul Volcker for his view of the general situation. Mr. Volcker, chairman of the Federal Reserve Board, responded with an emphatic warning that American prosperity is on a shaky foundation, threatened by this country's accelerating foreign debt. It's related to the federal budget deficit, he said, and "we are on an ultimately unsustainable path." The United States is in the process of transforming itself from the world's biggest creditor to the world's biggest debtor. By next summer, this country's foreign debt will be larger than Brazil's.
Someone asked Mr. Volcker whether and when the present inflow of foreign money might slow down or reverse itself. That, he replied, is entirely unpredictable. He did not add -- although it is also true -- that any sudden drop in that flow would mean higher interest rates in this county, higher inflation and probably a severe recession.
The possibility of a recession has also occurred to the White House where, also yesterday, the president's Council of Economic Advisers published its annual report. Combative in tone, it enthusiastically embraces the economic theory known as monetarism. There are doubtless many compelling reasons for the appeal of monetarism to the Reagan administration at the present difficult moment. One, clearly, is monetarism's claim that if anything unpleasant happens to economic growth, it's got to be the fault of the monetary authorities -- i.e., the Federal Reserve and Mr. Volcker.
Inflation, the council argues, is fundamentally a monetary phenomenon. If monetary policy is too loose, the inflation rate rises. If policy then clamps down on the money supply to restrain inflation, a recession results. All four of th recessions of the past two decades, the council says, are "quite clearly related to prior outbreaks of inflation and subsequent declines in the rate of money growth." So if there's a recession a year from now, you'll know whom to blame.
The influence of the Council of Economic Advisers is now at ebb tide, and its report won't have much impact on economic policy. But it probably reflects accurately the state of mind at the White House. The administration's political people have been thinking about the chances of trouble ahead in the economy and there appears to be a rising temptation to respond with attacks on the Federal Reserve. That would be exceedingly unwise, since it would frighten foreign investors and make matters worse than ever. But unwise or not, the advisers' report is a heavy hint that it might happen.
There's one more thing that you can say about this interesting difference of opinion: Mr. Volcker is right and the Council of Economic Advisers is, in this attempt at scapegoating, wrong.