Part 4/11:
Given its origins, the trade deficit should not be a primary focus of economic policy. It is considered irrelevant in terms of national health because it is inherently linked to domestic savings, investment, and consumption behaviors that Americans control. As long as the U.S. can finance its deficit easily—by attracting foreign capital—there is little reason to view the deficit as problematic.
The natural course is that the deficit is balanced by a surplus of American assets abroad. Foreigners buy U.S. bonds and equities, sending capital into the country, which supports the financing of the deficit. This mechanism is an elegant example of simple accounting identities that often get misunderstood or overlooked in political debates.