Now one can reduce the trade deficit by reducing fiscal deficits, but 1) fiscal spending in the US is basically set and 2) if you do improve fiscal stability of the US, this increases the demand for US assets which will increase the demand for US dollars, and you get the trade deficit again.

Basically economic models for trade deficits break down when you deal with the US because of the dollars status as world reserve currency. They work to some extent if you focus on one part of the equation (say US-China), but I’d argue that even if you bring US-China trade into balance, the structural pressures that cause the trade deficit will just cause the trade deficit to increase somewhere else.

DC: keys to the majority state-owned banking sector which is designated a strategic industry will never be turned over to foreigners.

Fine. Then Wall Street will settle for minority shares and joint venture agreements. And also Chinese companies are planning on going global. Tens, maybe hundreds of billions of dollars of M&A work.

Also, don’t forget that not all of China is socialist. Hong Kong is an integral part of the People’s Republic of China, and Beijing has big plans to make Hong Kong the financial capital of Asia.

Also economic nationalism works the other way. At some point the major Chinese banks will want to set up operations in the United States, and they’ll need the political support and lobbying muscle of American banks.

Oh please, Hank Paulson exclusively represents the narrow economic interests of Goldman Sachs. The federal taxpayer bailouts for Wall Street clearly demonstrate this. It’s privatizing the profits to Goldman Sachs, and socializing the losses to the US taxpayer.

The Chinese government is still a declared socialist state. The keys to the majority state-owned banking sector which is designated a strategic industry will never be turned over to foreigners.

And most crucially, China is a victim of US Dollar hegemony. The Washington Consensus is shameless in exploiting the reserve currency status of the US Dollar. The rest of the world exports “real” economic wealth to the US, and the Federal Reserve prints US dollars in unlimited quantities with a fractional reserve banking system.

Why not remove the US military presence from the Gulf Arab Oil states and the Iraqi oil fields? Let’s replace the petro-dollar with a multi-currency regime that includes the Euro, yen ,and yuan. The rest of the world will finally have “real” financial independence from US Dollar hegemony, but Americans will be forced back to “real work” and no more “free lunches”.

And most crucially, China’s peg means that China has voluntarily handed over its monetary sovereignty. Folks like me want China to have more monetary independence not less.

One concern that needs to be kept in mind as the world rebalances is the impact on U.S. food prices of any adjustment that does not involve a massive improvement in the man ufacturing and oil balances. While agriculture is playing an invaluable role in propping up the current account (not just the Midwest but also the South), how much more food can the U.S. export before the country faces roaring food inflation and rising malnutrition? This is yet one more reason why decisive action needs to be taken to bring about an orderly readjustment of world trade before things fall apart.

The American people should be aghast at the Washington Consensus Elite agenda for US Global hegemony over the Middle East, Russia, and China. The American people never signed up for this radical foreign policy plank. Why won’t Washington just leave the rest of the world alone? Hank Paulson and Ben Bernanke have totally crossed the line demanding the Chinese government submission to Washington K-Street financial lobby. As a sovereign independent state, the Washington Elites should respect China’s sovereignty. If the Chinese aren’t permitted to even manage their own monetary policy, then China has surrendered its entire sovereignty. In other words to Hank Paulson, mind your own damn business and butt out of Chinese affairs.

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