Is the U.S. trade deficit good or bad?

The trade deficit is bad, but it does not tell the whole story. There are cash inflows into the US economy that are not measured by the trade deficit and allow us to stay in balance. Some of these inflows are the purchase of US government debt which may or may not be a good thing as it allows us to spend more than we take in from taxes. Other inflows purchase US assets such as real estate, stocks and bonds and US companies. It is not necessarily good that foreigners buy these assets, but keep in mind that US companies and residents have been buying foreign companies and properties for years. So what goes around comes around.

The US has run a trade deficit for years now and in the many billions of dollars. The fact that we have low inflation and a decent economy reflect the inflows. With that said, we should be selling more in trade overseas and need to do more to effect this. I believe the most important factor in this change in our balance is the overvaluing of the dollar in comparison to third world currencies, particularly China. I find the comparisons between the cost of labor in China compared to US labor costs far in excess of the actual cost of living in both countries.

This imbalance in currencies is recognized but difficult to do anything about other than posture. The Chinese and other third world countries are exploding in population and need manufacturing work for their people. The local ability to absorb these goods is lacking, so they must export. This is an incentive to keep the currency undervalued. At the same time, developed countries benefit from the cheap labor overseas that allows us to buy computers, clothing and iPhones for far less than they could be manufactured in the US.

I would like to see an agreement with a market basket of developing countries that the dollar would depreciate against their currencies in a predictable and steady manner over the next five years. That would give both sides some time to adjust.