[lord_carbo]

Originally Posted by legoboy792

so you say that there is no problem at all?

No more than there is a problem walking across a street.

Most people don't even know the negative possibilities of a trade deficit anyway. Allow me to explain trade-deficits and why it's improbable that one will ever become a problem.

Think of the American economy as a box. Take some of the money out and there's less money in the box. So more must be printed to meet the demand for money (remember that money is a good like any other, and has its own supply and demand curves), and the demand curve for money basically goes up and down with the total wealth of the economy. That money that was taken out will likely go back in because that money is only good here. That'll increase the supply and consequentially reduce the value because the supply and demand were already in equilibrium. If you don't understand why the value of a dollar can decrease, imagine this: at this very instant, everybody in the world has their income doubled and their savings doubled. Well the same amount of goods and people would still be around, so that would just mean everything gets doubled in price. Thus, the value of each dollar was halved.

So people overseas eventually want to spend this money here. When they do that, inflation occurs. Except these overseas traders-- who have financial incentives, mind you-- wouldn't be doing this if they thought that the problem would be substantial. They have faith that the value of the dollar will hold up by the time they spend it. If everybody overseas wants to spend those dollars at the same time, then there will be many losers because by the time a lot of them get to spend it, the value of each dollar would decrease. This is why trade deficits are usually "auto-correcting." I use quotes because there's nothing really to correct. The trade deficit will probably never get too large because the people who want to spend American money will also lose out from inflation. If anything, they'll lose out more because we have their iPods and they have our paper.