This is ridiculous. Trade Deficit = Current Accounts. Current accounts are primarily composed of a nation's trade balance, plus any interest paid/received

This is ridiculous. Trade Deficit = Current Accounts. Current accounts are primarily composed of a nation's trade balance, plus any interest paid/received and things such as foreign aid. Investments = Capital Accounts. Capital accounts are the flip side to the coin which helps balance the books. Capital accounts are a measure of capital flow in and out of the country. The United States with its ridiculous current account deficit needs to attract tremendous amounts of Foreign Direct Investment. I.e, since we're owe money in our current accounts, we have to attract investments in our capital accounts (sell off assets) to balance the books. When a country has surplus of money (China and its trillion dollars in reserve), it means it is running a surplus in the current account. There's only two things it can do with it: hold it (which serves no purpose... as Milton Friedman said: you just exchanged goods for paper) or invest it. China invests it by buying up US T-Bills (hello Foreign Direct Investment), buying assets (oil rights, mineral rights etc), improving infrastructure, and creating government backed private equity firms to invest heavily and well to ensure future growth. This is also similar to what the smart Middle Eastern countries do. This way, down the line a country running a current account surplus will have a diversified and growing rate of return (interest/dividends) and can cover any dip in the trade balance. So that, simplistically, is how the system works. Trade deficits aren't inherently bad (after all, someone has to run a deficit since trade is a zero sum game), but running huge trade deficits and then running huge budget deficits on top of that is really, really bad. I hope that made sense. EDIT: wording.