(MONEY Magazine) – Since leaving his post as Treasury Secretary--perhaps the greatest since Alexander Hamilton--and becoming a director of Citigroup, Bob Rubin has kept a relatively low public profile. But in late October, Rubin spoke to me about the current state of financial affairs in this country and the world. He declined to comment on the Bush administration--"You should ask them what their policies are"--but he clearly takes different positions on many issues. His track record makes him a voice worth listening to. And we're going to be hearing more from Rubin in the near future. His new book, In an Uncertain World: Tough Choices from Wall Street to Washington, is due out in mid-November.

INSANA: Give us your assessment of where the economy is today.

RUBIN: Virtually all economists think we're likely to have a few quarters of very strong growth because there's so much stimulus in the system, partly because of the Fed's accommodative policy and partly because of defense spending, Homeland Security spending and that portion of the tax cuts that takes place in this period. The tax cuts are very badly designed for that purpose because only a small portion comes into effect during this period and because it was not targeted to those who would be most likely to spend it. Nevertheless, even that small portion has a substantial stimulative effect.

Q. What are the near-term risks?

A. The near-term risks and the long-term risks have, to some extent, converged. We have very high levels of consumer debt. We have substantial excess capacity in the United States. Japan and Europe are growing at only relatively moderate rates. We now have taken what was a very sound long-term fiscal position and, thanks to the growing budget deficit, instead have an exceedingly unsound long-term fiscal position. Then there are the geopolitical risks. And our current-account deficit. An economy this large can live with a large current-account deficit [which includes both our trade deficit and an imbalance in other goods and services] for a long time. On the other hand, it can't go on forever.

TAXES AND THE BUDGET DEFICIT

Q. What would you have done differently to stimulate the economy?

A. I would have had fiscal stimulus, but I would have had the measures be temporary. And I would have had tax cuts that were oriented primarily toward people with the highest propensity to spend, which is to say lower-and middle-income people, not cuts oriented very heavily toward the most affluent people, who have the lowest propensity to spend.

When you create a long-term budget deficit of that magnitude, you're going to have to solve it with additional revenue. You're going to have to solve it with additional discipline on the expense side. And you're going to have to have reforms in entitlements. The only way you can do those things is in some bipartisan fashion.

Q. You think it can be done?

A. We could repair this if we had the political will. We have now created sufficient difficulty for ourselves that it isn't going to be painless.

Q. What specific types of measures would you have implemented or suggested for near-term stimulus?

A. You could have temporary child tax credits, two-year tax credits oriented primarily toward middle-income and lower-income people. A temporary extension of unemployment benefits was an option. Or we could have had a rebate of some sort--for example, some portion of Social Security taxes for two years. Specifics are important but they matter less than the structural question.

Q. What are the implications of this set of problems for the economy?

A. Virtually every mainstream economist takes the position that large deficits will at some point have substantial impact on interest rates.

Q. They haven't thus far.

A. No, and the reason they haven't is because we've had very low private demand for capital, a weak economy and low interest rates. Once economic conditions improve, private demand will increase and at some point collide with the government's demand for capital to fund its deficit.

Q. But in the period from 1980 to 2000, when deficits were even higher in terms of percentage of gross domestic product than they are now, rates came down.

A. What happened in that period is that the markets for a long time didn't react too much. Then we got to the end of the '80s, and interest rates did go up. And as you remember, in 1989 the economy slowed down precipitously, and that led to a very difficult period economically. Then the 1993 deficit-reduction program began to have a beneficial impact on interest rates. So from '93 on, we had a very favorable interest-rate environment because we were going from the large projected deficits that the previous administration left us with to the very large surpluses that President Clinton left us with.

There's another very important factor. In the 1991-92 period, the deficit had taken on a symbolic significance. I don't think there's any question that in 1991, 1992, these deficits were undermining consumer confidence and business confidence and confidence in foreign financial markets in our economy. And conversely, when this deficit-reduction program was put in place in '93, it had a powerful positive impact on business and consumer confidence.

THE RISK OF THE TRADE DEFICIT

Q. What about the trade deficit?

A. The risk is that over an extended period it will affect your currency. Most people feel that if that's a gradual effect, we absorb it. The greater risk is that we have a sharp effect on our currency--the kind of thing that happened at the end of President Carter's term. The fiscal morass also has a risk of undermining confidence in our currency. So what we've done is compound the risk of a sharp adjustment.

Q. The deficits notwithstanding, our foreign trading partners have been buying dollars to keep the dollar from falling too rapidly because they don't want their currencies to appreciate. They keep recycling that money in the U.S. Treasury market, helping to finance the budget deficit and the current-account deficit. So an economic disaster is not a sure thing, right?

A. First, nothing's a sure thing. Second, you just described two different phenomena. One is where our trading partners intervene in the currency market, which is, I think, a temporary phenomenon and won't have a long-term effect. And the other is where they continue to accept dollar-denominated Treasury bills to finance our trade deficit. The problem is that we're very much dependent on their willingness to do that. The risk is that our current-account deficit and our fiscal deficit together could cause them to not want to do that anymore, except at a much higher price for the capital [which would mean higher interest rates].

Q. Given the growth disparity that we see even now between the U.S. and the rest of the world, isn't it likely that the U.S. will still be attractive for investors?

A. Yes. But all that has to happen is for large holders of dollar-denominated assets abroad to say, "The United States is more attractive than the others. But we're very heavily overweighted toward the U.S. and we're going to reduce our weighting."

ON THE DOLLAR

Q. How would you assess dollar policy?

A. I think we should have a strong dollar policy. What that would mean in this context is we don't use our currency as an instrument of trade policy. What we do is promote productivity and maintain a strong dollar so that we can keep lower interest rates and lower inflation, and get other people's goods at a better exchange rate.

Q. Wouldn't the depreciation of the dollar be one palliative if, indeed, the risk of deflation were evident?

A. First, the risk of deflation, it seems to me, is de minimus. And second, the risk is that these things don't stay under control. We don't want to run the risk of people losing confidence in the currency because that can have serious ramifications.

Q. It almost sounds as if you think the United States might be the biggest hot spot to worry about in the world.

A. The U.S. has tremendous economic potential. But we have created an enormous fiscal problem. If we don't repair it, the probability of having substantial adverse effects at some point is very high.

Ron Insana is co-anchor of CNBC's Business Center and author of Trend-Watching, published by HarperBusiness.