Warren Buffett on the MASSIVE US Trade deficit (2005)

A trade deficit occurs when there is a negative net amount or negative balance in an international transaction account. The balance of payments (international transaction accounts) records all economic transactions between residents and non-residents where a change in ownership occurs.

The most obvious benefit of a trade deficit is that it allows a country to consume more than it produces. In the short run, trade deficits can help nations to avoid shortages of goods and other economic problems.

In some countries, trade deficits correct themselves over time. A trade deficit creates downward pressure on a country's currency under a floating exchange rate regime. With a cheaper domestic currency, imports become more expensive in the country with the trade deficit. Consumers react by reducing their consumption of imports and shifting toward domestically produced alternatives. Domestic currency depreciation also makes the country's exports less expensive and more competitive in foreign markets.

Trade deficits can also occur because a country is a highly desirable destination for foreign investment. For example, the U.S. dollar's status as the world's reserve currency creates a strong demand for U.S. dollars. Foreigners must sell goods to Americans to obtain dollars. According to the U.S. Treasury Department, foreign investors held over four trillion dollars in Treasuries as of October 2019. Other nations had to run cumulative trade surpluses with the U.S. totaling over four trillion dollars to buy those Treasuries. The stability of developed countries generally attracts capital, while less developed countries must worry about capital flight.

Trade deficits can create substantial problems in the long run. The worst and most obvious problem is that trade deficits can facilitate a sort of economic colonization. If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that nation. That can mean making new investments that increase productivity and create jobs. However, it may also involve merely buying up existing businesses, natural resources, and other assets. If this buying continues, foreign investors will eventually own nearly everything in the country.

Trade deficits are generally much more dangerous with fixed exchange rates. Under a fixed exchange rate regime, devaluation of the currency is impossible, trade deficits are more likely to continue, and unemployment may increase significantly. According to the twin deficits hypothesis, there is also a link between trade deficits and budget deficits. Some economists believe that the European debt crisis was caused in part by some EU members running persistent trade deficits with Germany. Exchange rates can no longer adjust between countries in the Eurozone, making trade deficits a more serious problem.

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[davixie]

In the United States, the gap between rich and poor is widening every year, causing so many social problems. In 2015, for example, the richest 10% received nearly half of all income, compared with 35% 40 years ago. In other words, for every $100 produced 40 years ago, the rich got $35 and the others got $65, but now it has become a 50-50 split, with the rich taking 15% more from the national income cake. Compared with this income transfer rate, the "huge" bilateral trade deficit between China and the United States, which is often mentioned by politicians, accounted for less than 2% of the US GDP in 2018.

[johnvercellone]

No darn shame to be borrowing borrowing and not stopping decline in American productivity.Vocker Reagan White House left 4trillion in USA govt debt.