Is America Headed for an Economic Implosion?

This is a rush transcript from "On the Record," Sept. 16, 2010. This copy may not be in its final form and may be updated.

GRETA VAN SUSTEREN, FOX NEWS HOST: Republican Senator Judd Gregg lets us all have it right between the eyes. He is not sugarcoating his view about where we are headed, but he also has some ideas how we can avoid it. He went "On the Record" on Capitol Hill.

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VAN SUSTEREN: Senator, nice to see you, sir.

SEN. JUDD GREGG, R-N.H.: Greta, great to be back. Thanks for having me on. I appreciate it very much.

VAN SUSTEREN: We always like talking money with you and the state of our federal government.

GREGG: We don't have much money. And we are out of money. It's that simple.

VAN SUSTEREN: We'll talk about what we don't have then. You have been talking about putting a cap on discretionary spending. First of all, what is discretionary spending?

GREGG: It's a third of the government. The rest of the government is entitlement spending and interest on the debt. Entitlement spending is what people have a right to. If you're a veteran, you have a right to certain payments.

Discretionary spending on the other side is money which the government makes a decision every year to spend, whether it's on education, whether it's on defense, laying out and building roads. That's all discretionary. We don't necessarily have to spend it, we just make a decision to spend it and it represents 30 percent of the federal budget.

VAN SUSTEREN: You want to put a cap on increasing it?

GREGG: Absolutely. We simply can't afford the federal spending we're doing. We are running a $1.4 trillion deficit. We've got to control spending not only on the entitlement side which is where the majority of the spending is, but also on the discretionary side because it compounds very quickly.

In other words, if you spend $10 today to do a program, which is discretionary, next year you are going to spend that $10 plus you are going to add something more to it, and it builds on itself and it compounds very quickly.

Even though in the context of total federal budget if you only save $10 billion, which is a lot of money, but if you save $10 billion which is isn't perceived as a lot of money in the federal budget at one point of $3 trillion, the next year it is going to be $10 billion plus another $3 billion, then $13 billion plus another $3 billion, and it adds up very quickly.

So if you can control discretionary spending you can get some significant controls over spending in general.

VAN SUSTEREN: How was this received?

GREGG: Not well.

VAN SUSTEREN: Not well. Secretary of State Hillary Clinton talked about how our debt is a national security issue. So this is not just parties fighting against each other or politics. This is a very serious problem.

GREGG: It's huge. Our debt is not only going to undermine the prosperity of our children because they are going to have a lower standard of living, it is going to undermine our country's capacity to be secure because we are not going to have the type of economic strength we need to support a strong national defense or a strong international policy.

And so we have to get this debt under control. Discretionary spending is one of the things we should do. I think we should cut it by two percent every year for the next five years and thus taking it down ten percent. But at the minimum we should freeze the spending at last year's spending levels and carry that freeze forward.

VAN SUSTEREN: I don't know anybody in politics, House, Senate, or the executive branch, who doesn't think that the debt is a serious problem. Why can't -- everyone says it is horrible and our deficit is horrible. How come we can't get anybody to do something?

GREGG: Politics. It is much easier to spend money to get people to vote for you than to say to somebody getting a program, I'm sorry we are not going to give you as big an increase as expected. It's the politics of the next election.

Congresses are good at dealing with maybe trying to make a political statement, but they're not good when they have to take that political statement down to specifics. When you go from 30,000 feet to the ground level, when you say I want to reduce spending in generalized term, but then you get into the specifics of actually having to reduce spending, Congress doesn't do a very good job.

VAN SUSTEREN: I don't want to be an alarmist, but based on what you say, if Congress can't do a very good job and if spending is an effective tool for politicians and if they add every year and if the national debt is creating national security problems, as the secretary of state has said, at some point it seems we are going to implode.

GREGG: That's right. That's exactly what is going to happen.

VAN SUSTEREN: Do you have any idea when that is going to happen and what it is going to mean?

GREGG: Sooner rather than later.

VAN SUSTEREN: In my lifetime?

GREGG: Long before that. I think we are on a track now where we are going to be in a Greek-like situation within five to seven years, where the international community looks at the size of our deficits and debt and says you really can't pay these off.

VAN SUSTEREN: What does that mean? So we can't pay our bills. Then what?

GREGG: Well, two or three things happen, and they are all bad. You have to inflate the currency in order to pay off your debts with inflated dollars, which means that everybody's standard of living goes down and savings eroded dramatically.

You have to dramatically increase taxes, which means people are going to lose jobs because it going to slow the economy dramatically to increase taxes. Or you actually end up with a default situation, which I don't think would happen.

VAN SUSTEREN: What happens if we default?

GREGG: We can't borrow money the next day.

VAN SUSTEREN: China says no more.

GREGG: China says no more. And then the next day when you have to meet your bill and you don't have the money in your cash flow pay for it and you have to go out and borrow it, somebody is going to say we are not giving you any more money because you just defaulted, or the interest rate is going to be so high it is going to be unsustainable.

A very interesting fact here is that within 10 years under the Obama present budget plan, interest on the debt, which is a payment to China by the way, which we get no benefit from, whoever is lending us money, will be the biggest item in the federal budget. It will be bigger than national defense -- $800 billion.

VAN SUSTEREN: Senator, nice to see you, sir, and lots of big news in your home state.

GREGG: It is. We are going to have an interesting election. We have a very strong candidate. The person going to succeed me hopefully, Kelly Ayotte, our former attorney general, is a really talented individual and I'm excited about her as our nominee.

VAN SUSTEREN: We're going to miss you here in Washington.

GREGG: Greta, that's nice of you say. I hope you will still talk to me.

VAN SUSTEREN: I will still talk to you, and we've got two months before the election. Thank you, sir.

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