There is often talk of the trade deficit.  It is also referred to as the balance of payments.  This is not to be confused with the national debt.  While I don’t think the trade deficit is completely irrelevant, I believe there is misunderstanding.

There really is no problem with having a trade deficit if it occurs naturally.  The U.S. government has a trade deficit with China (to use one example).  China has a trade surplus.  China sells products to people in the U.S.  Instead of using the U.S. dollars to buy U.S. goods, the dollars are often used to buy U.S. treasury bonds.  This represents the trade deficit.

Again, there is nothing wrong with a trade deficit.  The Chinese (whether it’s the government or a businessman) could also put dollars into U.S. stocks.  They might prefer to invest there.  New York City runs a massive trade deficit.  Money flows to Wall Street, but Wall Street isn’t producing consumer goods.  Nobody seems to have a problem with that (although there’s probably someone).

One of the problems with the massive trade deficit is that much of it may be caused by excessive debt.  If the government weren’t running a huge deficit every year, then it wouldn’t need to sell treasury bonds.  If the U.S. government had no national debt, there would be no trade deficit to worry about.  If there were a trade deficit, it would be foreign countries (governments or people) investing their dollars in other things.

The only threat of a trade deficit is that a foreign government could decide to unload U.S. treasuries all at once and drive up interest rates quickly.  But again, we wouldn’t be in that predicament if there were no national debt.  But the same could happen if U.S. citizens decided to sell bonds also.

There are three main buyers of U.S. treasuries.  There is the Federal Reserve.  There are individual investors (U.S. or foreign).  And there are foreign governments/central banks.  These treasuries could be unloaded by any one of these parties.  The only one controlled at all by the U.S. government is the Fed.

Don’t get all worked up over the trade deficit.  We should get worked up over the massive national debt that causes the massive trade deficit.