Sec. Henry Paulson: The Complete Interview

March 4, 2007 — -- Following is an unedited transcript of George Stephanopoulos' interview with U.S. Treasury Secretary Henry Paulson on "This Week."

STEPHANOPOULOS: Mr. Secretary, thank you very much for doing this.

PAULSON: George, it's my pleasure.

STEPHANOPOULOS: So it's Tuesday afternoon and there's this 10-minute period where it looks like the bottom is dropping out of the market. How worried were you?

PAULSON: George, I spent a career in markets, looking at markets. So I always look at markets carefully.

But what I really focus on are the underlying economic fundamentals. And we've been in a period now for two or three years where I've seen the strongest global economy I've witnessed in my lifetime: solid growth around the world, relatively low inflation rates, high levels of liquidity, a very healthy economy in the U.S. making the transition from really unsustainable growth to more sustainable growth.

So I, you know, that's what I was really looking toward.

STEPHANOPOULOS: Was there any sense that this had to come since we'd gone so long without any kind of a problem?

PAULSON: But I've just got to say, markets, anybody that's watched markets know that they don't always -- over time they reflect economic fundamentals -- and markets never move in any one direction forever in a straight line. And so I look at it and put it in perspective and say, over the last year, the Dow's up almost 11 percent; the S&P's up 9 percent; and I'll take it.

STEPHANOPOULOS: Now, one of the things that did trigger this adjustment on Tuesday, a lot of people say, were the comments of Alan Greenspan, when he said that a recession was possible this year.

What are the chances of a recession this year?

PAULSON: Well, let me say, the -- I believe -- let me step back and say I've got a very high regard for Alan Greenspan. And I wasn't there, didn't hear the comments.

Clearly, no one's got a crystal ball. So there's always a possibility that there will be a downturn, always a possibility. But I don't see it. I think we have a healthy economy in the U.S.

You know, a year ago, when the growth rates were much higher, I was concerned. I said, is this going to be sustainable?

Now I'm looking at it and I'm seeing a situation where it looks like we're successfully making the transition. The consumer's strong. Exports have been greater than imports for quarters running, and they're adding to our growth.

We've got a very healthy labor market, 7.4 million jobs created since August of '73. Inflation seems to be contained.

And what really makes a difference to me is the average worker is now beginning to feel the benefits. Real income is up 2.1 percent for the average American worker over the last year.

So I'm feeling good about the U.S. economy.

STEPHANOPOULOS: Is there more danger of inflation or deflation, right now?

PAULSON: Well, let me say this. I'll leave that to Ben Bernanke to decide. But I'm feeling good about this transition and how we're making it. And I'm feeling good about inflation right now.

STEPHANOPOULOS: The Democrats are pushing for a rate cut right now. You're not going to join them?

PAULSON: Listen. I'm going to let the chairman do his job. I think he's doing a fine job.

STEPHANOPOULOS: One of the other factors that people have cited, in this market blip on Tuesday -- Senator Clinton said it was an alarm bell about the amount of foreign debt held by China and other nations.

How big a concern is that to you?

PAULSON: George, I've spent my time looking at global capital markets. I've spent a lot of time, over my career. I think I know something about global bond markets. I've watched government bond market deliver -- develop globally. And as I've worked with issuers, I always tell them it's in their best interest to have as much demand as possible; to have it be global demand, a diversity of demand.

And as I look at the demand for U.S. treasuries, I'm very pleased to see demand from all around the world; from governments, from individuals -- I see that as a very positive thing.

Now, when we look at, let's take China or Japan. In China, there's a fair amount of holdings of U.S. treasuries by the government and by other individuals.

But all the Chinese holdings are not greater than the amount of Treasuries that trade in a single day in the U.S. That's how much diversity we have in our holdings.

So, to me, the key thing -- it's a positive that foreign investors want to own our treasuries. Interest rates are lower, it's helping our economic growth in this country. The key thing is to keep our economy growing, to have it to continue to be the best economy in the world so foreigners will want to invest here.

And I see that as...

STEPHANOPOULOS: But isn't the flip side, though, that they're holding our economic fate in their hands?

PAULSON: Well, I tell you, I don't look at it that way. We're holding our economic fate in our own hands. And if we keep this economy competitive and growing, they're going to invest here.

And let me also tell you there's great diversity. When people talk about foreign holdings, as I said, Japan is the largest holder.

If we look at all of the entities, all of the individuals, the government holdings out of Japan -- you know, all of those holdings are a little bit more than the treasuries traded in one day in the U.S. A little bit more than one day.

In China, it's lees than one day. We've got great diversity in the holdings of our treasury securities, and we should be very pleased with that.

STEPHANOPOULOS: But doesn't it make it more difficult, because China and Japan together, I think, hold about $1 trillion of our debt. Doesn't it make it more difficult to negotiate with them when they're our banker?

PAULSON: I don't see it that way. The $1 trillion, we trade $500 billion a day in U.S. treasuries. That's two-days' trading in U.S. treasuries. And, and again, that's held by multiple entities in both of those countries. I look at it and say, as long as our economy is growing and we don't have enough savings to support that growth, we can be very pleased that foreign investors want to invest in our economy, have confidence in our economy, and they come to the U.S. to make their investments.

STEPHANOPOULOS: You probably know as much or more about China than any other American. You've been there more than 70 times, you're heading there again this week. How are we supposed to think about China?