trade deficits are (highly) over-rated

A friend emailed me about the trade deficit and killing two birds with one stone, I decided to post my response:

The problem with the trade deficit is that only describes one category: goods and services. Since our activity with foreign countries must be involve a "balance of payments", we should look at the other category (investments) as well. If we run a TD in G&S, we necessarily run an investment surplus-- ironically, probably a sign of strength!

For example, if we purchase $200 billion in G&S from country X and they purchase $150 billion from us, they still have $50 billion green pieces of paper to buy stuff. If they're not buying G&S, the other option is investments-- a common and reasonable decision given the rate-of-return/risk combos available within our economy (compared to elsewhere).

We've run a TD in G&S for most of our country's history.

The trade deficit is most useful for promoting trade protectionism-- to make it seem like we need to limit imports of G&S to deal with this "problem". Of course, this benefits certain interest groups (at the expense of the country as a whole).