Isn’t the risk what you alluded to above: The ‘Chinese’ may buy real assets, factories, etc. This would seem to be a negative. We wouldn’t want another country owning all the real assets here. The solution seems to be … we don’t let them. They are free to buy goods and services, but not real assets.

And need not end

So, why is it not benign? As long as it continues.

And why would it end, if left to its own devices? (i.e., we don’t resurrect Smoot-Hawley or something similar).

“I’m not saying trade deficits are ‘benign,’”

Warren,

What are the hazards of the trade deficit? In a floating exchange rate regime, is it the constant depreciation of the dollar as we have seen? How does this impact other things in the economy? Can it continue indefinitely? Will it tend to reverse itself at some point, like a cyclical phenomenon?

a nation can only run a trade deficit if other nations want to net export to that nation. it’s up to the other guys, not the importer. however today, most nations want to next export, and most any nation could take advantage of that value.

it’s all about how you define strong and weak, along with your success in sustaining domestic employment and output.

And why would they want to “support their exports”, if exports are a cost?

Because net exports are a positive contributor to GDP (C+I+G+(X-M)). A country that net exports accumulates financial assets (= “wealth”).

GDP and wealth are considered to be goood things.

“You can never be too rich or too thin” – Wallis Simpson

A country that net imports has higher consumption (=standard of living).

The trade balance is worldwide, but considering just for a moment the US and China in isolation, at some point perhaps the Chinese will have accumulated “enough wealth”, and may desire to raise their standard of living, by becoming a net importer. I.e., by buying lots of US exports, or maybe even by buying things that we have never before exported, or that can’t be exported, like farmland or factories or amusement parks.

The increased demand would cause rising prices, perhaps even inflation if we are already at full employment (and government fails to run an offsetting surplus). If the US becomes a net exporter, then we sacrifice standard of living and accumulate financial assets. (This is what we did from the time of Columbus until the 1970′s or so, and I have to wonder if that is not why we were able to rise to the status of “superpower” in the last century.)

The Chinese might send all the food they grow on their farmland to China, and use the profits from their factories and amusement parks to buy even more American-made goods.

Is exporting, and accumulating financial assets over a period of decades, the thing that enables a country to become a net importer, and live the good life? Can a poor country run a trade deficit and become rich? Why is post-war (West) Germany a strong economy, and others in Europe relatively weaker? Is it because of their decades of net exports?

Yes on the USD/JPY that’s correct. I was referring to $90 on the yen chart alone. I wasn’t referring to the USD/JPY. I should have clarified that. We’re saying the same thing.