Former Federal Reserve Chairman Paul Volcker warned on Friday that trillion-dollar deficits posed a threat to the stability of the U.S. economy and the dollar, and said he is frustrated by the gridlock in Washington.

Speaking before the World Affairs Council of Oregon, Volcker said that prolonging trillion dollar deficits can't be a reality and that the United States is on course to have its public debt exceed the size of its gross domestic product.

One way or another, we do have to return to a balanced budget, he said in prepared remarks.

Volcker's speech came on the same day that the Congressional Budget Office said the U.S. budget deficit had totaled $871 billion for the first seven months of the year, which is significantly above the previous year's pace. On Thursday, Vice President Joe Biden led a bipartisan meeting in an effort to strike a deal with Republicans on cutting the growing federal deficit and averting a default.

They face an August 2 deadline to raise the country's $14.3 trillion debt limit.

Volcker, who stepped down early this year as the chairman of President Barack Obama's Economic Recovery Advisory Board, said he was concerned about how the U.S. consumes and borrows to the point that China, Japan and other foreign countries hold more than 5 trillion dollars of U.S. government obligations.

Consider that statistic in the light of prospects for continuing deficits, doubts about future inflation and the international stability of the dollar, he said, noting that the U.S. is running out of time to fix things.

In order to address the deficit, Volcker said he agrees lawmakers need to tackle discretionary spending, an area that could help the U.S. save $300 billion from present projections by 2020. But that alone, he said, will not be enough to address the trillion dollar deficits.

I will put the point bluntly, he said. It is simply unrealistic and irresponsible to believe budgetary balance can be achieved without higher revenues relative to GDP. We won't generate those higher revenues without tax reform.

Separately, Volcker also discussed his views on the progress made so far on the Dodd-Frank Wall Street overhaul legislation and other efforts around the world to bolster regulation of the financial markets.

Volcker was the driving force behind a pillar of the Dodd-Frank law known as the Volcker rule, which cracks down on proprietary trading by big banks. Although he no longer has a formal advisory role in the administration, he still visits the White House on occasion.

In particular, he said he was concerned about a failure to properly address certain key areas including credit-rating agencies, accounting issues and money market funds -- an issue the Securities and Exchange Commission plans to explore in a roundtable discussion next week.

Taken all together, my personal grade on financial reform is incomplete, he said, noting that it is even more lacking abroad than in the U.S. I do not equate incomplete with out of time, but I fear that momentum in the reform effort is waning.

(Reporting by Sarah N. Lynch; additional reporting by Caren Bohan, Alister Bull, and Richard Cowan; Editing by Bernard Orr)

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