The Current Trade Deficit as a threat to the US Economy
How big a threat the current trade deficit is to the US economy is a subject of a great deal of debate. Some economists think it is a serious threat while others don't consider it to be a big problem at all. There is even a small group of economists who argue that a current trade deficit is actually a good thing. This argument goes that only countries with strong economies can have a trade deficit since they need to have the money to pay for the foreign products. The truth is that the current trade deficit is a problem but not a huge threat.
The main reason that the current trade deficit is a threat to the US economy is that it means that more and more of the country's assets are being held by foreigners. This isn't necessarily a problem unless they decide that investing the US is no longer a good idea. Basically when we have current trade deficit we are buying more products foreigners than we are selling to them. This creates a situation where money is being drained out of the country. The result is that many of our assets are being held by the people who we are buying products from. If they were to decide they no longer wished to hold these assets they would depreciate in value. That would make investing in the US less desirable and it would become more difficult to raise capital.
The other big problem with a current trade deficit is that tends to cause a decrease in the value of the US currency. This is because when people export products to the US they will be paid in US dollars, however they will want to convert that money back into their own currency in so they can spend it at home. This reduces demand for US dollars and causes them to depreciate in value. In some cases this is a good thing since it does make American products more competitive in the export market. However in the long run it will hurt the economy by discouraging investment. There is no value in a foreign investor buying stock in a US company for example if he ends up losing all of his profits on the exchange rate fluctuations.
A current trade deficit is also an indicator that the country is carrying too much debt. In general countries with trade surpluses tend to have economies in which people are saving money and the government is running a balanced budget. This is mainly because countries with trade surpluses tend to have them because people are saving their money rather than buying products. Having too much debt is a problem for a number of reasons but mainly they all come down to the fact that anytime you borrow money you need to pay it back. In a lot of ways the current trade deficit is just borrowing money from other countries.