Government and the trade deficit

Craig and I once discussed the importance of the trade deficit to the economy. My theory was that we as a country could afford such a substantial trade deficit because we must be creating value, otherwise we'd be sending capital overseas - 'capital flight'. After further thinking on this, I wonder what would happen if all those goods being imported were no longer being desired by the American consumer. Yes, our trade deficit would go away but what would become of our economy? With trillions of dollars available to spend and only the domestic industry to provide goods, I would imagine we'd be in for a serious bout of inflation. Too much money, not enough goods - classic.

Let's not take such a simple view. What if the money had somewhere else to go? What if Americans started saving all that dough? There would be lots of funds available for investment. If there was a shortage of capital, these new funds would not cause a problem but instead would spark business expansion or startups. But what if our lack of business startups was not caused by a lack of capital? What then? When too much money chases too few investments, wouldn't we start to see speculation which leads us down the trail to a 'bubble'.

So, is the trade deficit a symptom of how successful we are are creating value? If we tried to reduce it through less consumption, would cause ourselves more problems through inflation or speculative bubbles?

Maybe the deficit is the least of our worries.