Hank Paulson takes on the world

In a wide-ranging interview with Fortune, the U.S. Secretary of the Treasury explains why, despite the "strongest global economy" he has ever seen, it still "pays to be vigilant."

On risks: We haven't had a global financial shock since 1998. I believe that these large and dramatic increases in private pools of capital [hedge funds and private equity] and in the credit derivatives markets since then have helped manage and disperse risk and make the economy more efficient. When we do have one - and it's when, not if; that's not me being negative, it's just that we're not going to defy economic gravity - we'll be seeing for the first time how some of these instruments perform under stress.

On credit spreads: When you go through an extended period of very benign economic conditions, there's a tendency for capital market participants to not be as disciplined as you might want to see. Perhaps this recent move up in interest rates is a wake-up call that asks people to focus on the potential for excesses.

On the Chinese yuan: There is something otherworldly about a country that is so big and integrated in terms of global trading and manufacturing, and yet that is not integrated in terms of capital markets. The U.S. Congress wants the same thing I want - we want the Chinese to move their currency up quicker in the short term, and in the intermediate term to get to a point where we're not arguing about it, because it's market-determined.

On rising protectionism: That is going to be the challenge for the foreseeable future. The public is concerned about globalization, and the face they want to put on everything they don't like about globalization is China. No matter what people like me may think, you're facing an uphill battle if the public doesn't buy in.

On U.S. competitiveness: I believe economic integration is inevitable, and it's good for our country, because I believe no other country is better positioned than the U.S. to compete long term and win. I just dismiss the notion that somehow or other China - with all the issues it has - or anyone else is going to take its growth rate, and extrapolate it, and pass the U.S. in ten or 20 years.

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