May 02, 2011

For developed countries, pundits worry that a country with a trade deficit means the country is living beyond its means and that its best days are behind, or that the country is eating its way into the poorhouse. The implication here is clear: it predicts a negative relationship between trade deficits and the stock market relative to the rest of the world. There is another, alternative interpretation: the reason for borrowing is that there are great investment opportunities, and, by borrowing, investors take advantage of these opportunities.

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