Federal Reserve Chairman Ben Bernanke told Congress on Wednesday that America is facing something approaching a debt Armageddon.
"The deficit will recede somewhat over the next two years as the temporary stimulus measures wind down and as economic recovery leads to higher revenues," he said, testifying before Congress' Joint Economic Committee.
"Thereafter, however, the annual deficit is expected to remain high through 2020, in the neighborhood of 4 to 5 percent of GDP," he said.
The GDP is the combined value of all goods and services that the economy produces. Each deficit requires the Treasury Department to sell bonds to finance the accumulated federal debt. Under the best of scenarios, the ratio of debt to GDP, one indicator of national economic health, would be well over 70 percent.
But that assumes Congress and the White House won't do what they've already promised to do -- extend most Bush-era tax cuts and adjust the alternative minimum tax in a way to protect middle class earners from its heavy levies. Under this more likely scenario, Bernanke warned that annual deficits and accumulated debt would surge to historically high levels.
"The deficit at the end of 2020 would be 9 percent of GDP and the federal debt would balloon to more than 100 percent of GDP," he said.
The last time debt equaled or exceeded the GDP was in the years just after World War II. If Bernanke's prediction comes true, in 2020, taxpayers would have to provide $1 trillion a year in interest to finance the national debt. At the White House, Treasury Secretary Tim Geithner accepted the premise but rejected the prediction.
"Of course that would be unsustainable," Geithner said. "But that's not going to happen if Congress adopts the policies the president has laid out. It will be very important to make sure that we have a strong recovery going forward that Congress demonstrate, that we're able to make some tough choices to bring those deficits down."
Bernanke once again called on lawmakers and the White House to come up with a plan to whittle down record-high budget deficits.
Even though sizable deficits right now are "unavoidable" given the damage wrought by the recession, the persistence of red ink raises risks to the country's long-term economic health, he said.
A credible plan to pare the deficit could provide the economy with benefits in the near term, including lower longer-term interest rates and increased consumer and business confidence, Bernanke told lawmakers.
"Addressing the country's fiscal problems will require difficult choices, but postponing them will only make them more difficult," he warned.
On the economy, Bernanke seemed slightly more optimistic that the fledgling recovery will keep on going after massive government stimulus fades later this year. Incoming economic barometers suggest that growth in demand by consumers and businesses "will be sufficient to promote a moderate economic recovery in coming quarters," he said.
Consumers are spending again after having cut back sharply during the recession. Going forward, consumer spending should be helped by a gradual pick up in jobs, a slow recovery in household wealth from recent lows and some improvement in the ability to get loans, Bernanke said.
That assessment of consumers -- whose spending accounts for 70 percent of national economic activity -- also appeared more upbeat. In recent weeks, Bernanke and other Fed officials have cited a litany of headwinds facing consumers, including high unemployment, rising home foreclosures and sluggish wage growth.
Shoppers boosted retailers' sales by a strong 1.6 percent in March, a better than expected showing, the government reported on Wednesday. That's a promising sign that consumers will do their part to keep the recovery going.
Another government report showed that inflation remains tame. Consumer prices edged up 0.1 percent last month. Low inflation gives the Fed leeway to hold interest rates at rock-bottom levels to support the recovery. Despite a steep run-up in energy prices, inflation is under control, Bernanke said..
Fielding questions from lawmakers, Bernanke repeated the Fed's pledge to keep interest rates at record lows for an "extended period" to aid the recovery. Rates have been at super-low levels since December 2008.
At some point when the recovery is firmly entrenched, the Fed will need to start boosting rates to prevent any inflation problems.
The soonest the Federal Reserve will begin raising short-term interest rates is the fourth quarter, according to 34 of the 44 economists polled in a new AP Economy Survey that debuted on Monday.
Businesses, meanwhile, have boosted spending on equipment and software at a solid pace and factories are benefiting from stronger demand for U.S. exports, Bernanke noted. Improved financial conditions are also helping out the economy.
However, problems still remain.
Bernanke said weakness in the housing and commercial real-estate sectors is putting "significant restraints" on the pace of the economic recovery. And, the poor fiscal conditions of many state and local governments have led to continuing cutbacks in workers, another force that will hold back the recovery, he said.
On the jobs front, Bernanke was encouraged by the 162,000 jobs added in March, the most in three years. However, the moderate pace of the economic recovery means that the 8 million-plus jobs lost by the recession won't quickly return. Bernanke said it will take a "significant amount of time" to restore those positions. He didn't say how long.
The unemployment rate has been stuck at 9.7 percent for three straight months, close to its highest levels since the early 1980s.
Bernanke said he is especially concerned about that 44 percent of the unemployed in March had been without a job for six months or more. "Long periods without work erode individual's skills and hurt future employment prospects," he said. Younger workers may be particularly hurt if the weak labor market prevents them from finding a first job or from gaining important work experience, Bernanke said.
On other topics Bernanke said:
--China should let the value of its currency rise, a move that would support U.S. exports by making them cheaper to foreign buyers.
--The Fed doesn't see speculative bubbles forming in assets such as stocks, bonds or commodities, at this point but is closely monitoring the situation. Some worry that the Fed's low rates will create another bubble like the one in housing that burst and threw the economy into a recession.
Fox News' Major Garrett and The Associated Press contributed to this report.