TORONTO (Bloomberg)—Maurice R. Greenberg, the investor and executive who built American International Group Inc. into the world's largest insurer, said the U.S. is heading into a period of high inflation and high interest rates as it attempts to cope with its debt.

That will “lead to a lot of distortion” in the U.S. economy in the years ahead, Mr. Greenberg told a business audience in Toronto Thursday. The federal government must cut its military budget to 2% of gross domestic product, the measure of the economic output of the country, to reduce its budget deficit, Mr. Greenberg said.

“We may not be the policeman of the world going forward,” said Mr. Greenberg, the honorary vice chairman of the Council of Foreign Relations.

Mr. Greenberg, 84, was forced to retire from AIG in 2005 after state and federal probes into a reinsurance transaction. New York-based AIG nearly collapsed from soured housing market bets in 2008 and was bailed out with $182.3 billion in aid.

Former New York Attorney General Eliot Spitzer sued Mr. Greenberg in May 2005, alleging he helped mislead regulators and investors. Mr. Spitzer dropped portions of the lawsuit in 2006. Mr. Greenberg, who has denied any wrongdoing in the New York civil suit, asked a court to dismiss the rest.

Mr. Greenberg lashed out at Mr. Spitzer and current New York Attorney General Andrew Cuomo during his 90-minute presentation at the Grano restaurant in midtown Toronto.

‘Same cloth'

“Cuomo is cut from the same cloth as Spitzer,” Mr. Greenberg said. “Cuomo doesn't want to be attorney general. He wants to be governor.”

Mr. Greenberg blamed regulators for the collapse of financial institutions like AIG and Lehman Brothers Holdings Inc., which led to a worldwide economic recession.

“The regulators didn't do their job,” Mr. Greenberg said. “Nobody paid attention.”

The son of a candy-store owner on Manhattan's Lower East Side, Mr. Greenberg stormed Omaha Beach when he was 19 during the 1944 D-Day invasion of France and earned a Bronze Star in Korea, eventually rising to the rank of captain.

&Copy;2010 Bloomberg News