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Monday, June 19, 2006

Trade Deficit or Foreign Investment?

Economist Don Boudreaux of Cafe Hayek, reacting to doomsayers who see a trade deficit as an indication of US decline, explains there is a flip-side to the argument:

Does foreign direct investment here of nearly $100 billion, in 2004, evince economic decline? How about foreigners' continuing attraction to dollar-denominated equity shares and bonds? Whenever foreigners invest in dollar-denominated assets they reveal confidence in the American economy - and they strengthen it by bringing capital to our shores.

We have explained it before in this blog. If you are a seller of goods, you do not sell to deadbeats. If the buyer provides insufficient value, you do not execute the trade. If you do trade with a deadbeat, you certainly get rid of inventory but you lose in the exchange. Do these anti-trade pundits believe that the producers who sell to consumers in the US have given no thought to the value of the pieces of paper we trade with them in return? Or do they see strength in those pieces of paper that make them worth more than a similar number of pieces of paper (with different pictures on them) from elsewhere?

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