Looking for experts on international trade and finance out there...I have never been able to fully grasp the basic textbook macroeconomic accounting identity stipulating that trade deficits = capital inflows
For example, the classic example always presented is that if the U.S. buys $100 worth of Chinese goods (imports/trade deficit), the Chinese manufacturer then turns around and purchases $100 of U.S. treasuries (capital inflow) .
Doesn't this logic fall apart if the Chinese manufacturer decides to store the $100 in the bank, or under the mattress? What if he simply lights the $100 on fire? In any of these scenarios, how does the trade deficit = capital infow hold true?
This may sound like silly/immaterial question, but I suspect my inability to mentally reconcile something seemingly so trivial limits a deeper understanding of the dynamics of internal trade and finance.
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