In November, prior to his selection as US treasury secretary, Henry Paulson gave an extended interview to Germany’s Der Spiegel, offering some of his views on topics including the US deficits and China’s treasury holdings. While generally optimistic on foreign holdings of T-bills, Paulson is not in denial about the deficit being a problem.:

SPIEGEL: The U.S. economy is increasingly dependent on the willingness of the Chinese and other Asian countries to buy huge quantities of U.S. dollars to keep the currency from crashing. Is America’s monetary independence under threat?

Paulson: I think it’s ironic when the very people who rely on growth in the United States for their exports complain about our deficit at the same time. The majority of the world’s countries depend on America as the most important engine for growth.

SPIEGEL: But this situation - where the world’s poorest nations feed capital to its richest country - flies in the face of all experience. It would be like water running up a mountain.

Paulson: It is as much in China’s interests as those of the U.S. that China invests in the dollar. I would say the same about some of our European trading partners. Moreover, a lot of money around the world is seeking investment opportunities. Growth and returns on capital are important drivers of these inflows.

SPIEGEL: Nonetheless, how do we get out of this situation?

Paulson: The United States can only reduce its budget deficit through further growth and greater spending discipline. Trade imbalances normally take care of themselves over time, as currencies adjust or - as in Europe - there is increased growth. Provided, of course, that we are not going to have trade wars or an increase in trade barriers. Those would be very bad for the world economy.

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