Capitalism in Conflict

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Future historians may choose 1989 as the year the cold war between capitalism and communism ended and a new conflict began within capitalism. They may argue that it was in 1989 that America and the West turned from containing the Soviet Union to containing Japan. The new conflict arises from three historic shifts that have shaken the foundations of the postwar world: America's relative economic decline, the rising economic power of Japan, and the decline of the West's old common enemy of communism. Indeed, it is the dissolution of this threat that is sowing the seeds of a capitalist cold war.

If the old cold war was a competition driven by the race for military superiority, the quest for economic and technological domination will propel the new competition. The meteoric rise of Japan has made America increasingly insecure. What drives America to contain Japan, however, is not so much Japan's economic ascendance, but the failure of American leadership, which feeds national insecurity and xenophobia.

II

Few economic developments have generated as much raw emotion and intellectual confusion as the U.S. trade deficit that turned America almost overnight into the world's largest capital importer and debtor. One widely shared concern is that America's debtor status and dependence on capital from abroad have put the nation increasingly at the mercy of foreigners. America, it is argued, has lost its independence.

In particular many observers fear that foreign, and especially Japanese, investors who are now eagerly financing America's deficits will someday suddenly get nervous and pull out, causing a crash of the financial markets and a "hard landing" for the economy. These anxieties ignore a fundamental fact: In an increasingly interdependent world dominated by global market forces, an open economy with two-way capital flows (whether in deficit or in surplus) is vulnerable to the actions of foreign and domestic investors alike.

If Japanese investors lose confidence in the dollar, so will American investors-indeed, it is American investors who may lose confidence first. Market confidence does not respect national boundaries; a sudden collapse of confidence in the dollar would be worldwide. Foreign and U.S. investors would not act very differently. Both would attempt to shift out of dollar-denominated U.S. assets. Thus, capital withdrawal by foreigners will be accompanied by capital flight by Americans, or vice versa...