Lloyd Blankfein, Chief Executive of the Goldman  Sachs Group Inc (NYSE: GS) recently sounded off on the prospect of a fiscal  cliff in the United States,  and the damaging effect such brinkmanship would bring to the economy. Blankein  feels that the United  States’ credit rating and status as the world’s  reserve country would be threatened if the federal government  doesn’t resolve the “fiscal cliff” before automatic spending cuts and tax  hikes kick in at the end of the year.

Blankfein commented “There’s a substantial risk that we don’t  get action, and it will be very, very bad for the rating. “ While speaking on a  panel at the Clinton Global Initiative annual meeting here, he further noted  “And it won’t be just because of our credit. It will be because of the  dysfunctionality of the government, and we will deserve to be graded as a  dysfunctional government.” Despite this, Blankfein is optimistic, as most  observers are, the cooler heads will ultimately prevail and a compromise will be  reached that will allow the US to avoid the fallout of such  conditions. If unresolved, the cost  could be an estimated 4% of gross domestic product, he  said.

The low cost of borrowing that the US  government enjoys allows it to finance its deficit at a very cheap cost – that  cost could rise dramatically if a deal is not reached, and the government could  have to reshape itself dramatically. Continued government inaction would make  U.S. government debt less desirable,  he said. “And why should we be the reserve currency of the world if we can’t  manage the health of the economy and therefore the value of the currency?” asked  Blankfein, who is also Goldman’s chairman.

“The U.S. is an amazing beneficiary of  being the reserve currency. I think people should start realizing that’s the  real ticking time bomb,” he said. Due to the disaster underway in Europe for the  past few years, attention has been diverted from the calamity in the  US. As Europe eventually stabilizes  though, attention could squarely be turned to the United  States, leaving a precarious situation.

In a sprawling discussion that touched on politics  and financial regulation, Blankfein defended Ben S. Bernanke, chairman of the  Federal Reserve, for the central bank’s latest monetary stimulus aimed at  lowering interest rates and spurring growth. Many critics have decried  Bernanke’s measures, but Blankfein feels the Fed had no choice but to use those  powers. “There’s no inflation on  the horizon — of course there’s inflationary fears in the long run,” Blankfein  said. “But you have a clear and present danger of a deflationary  position.”