The economies of the United States and Japan are treading the recovery path; there is no need to worry, as there once was, about a free fall. This sanguine outlook for the world's two largest economies is now clouded increasingly by falling U.S. stock prices. What's worrying is an apparent shift in investor behavior, with dire implications for international capital flows.
The rout on Wall Street, which stems in part from high-profile corporate scandals, highlights the potential vulnerability of an economy hooked on a stock market boom. Japan's problem is a glut of money created by years of rock-bottom interest rates. In the absence of real demand, that surplus money appears to be going nowhere. Investors are losing confidence, unsure of where to put their money.
America's Achilles' heel is well known: its gargantuan appetite for consumption that is creating enormous deficits in the balance of international payments. The result is a chronic shortage of money. To keep the stock market going, a lot of money must be attracted from around the world. If the flow is disrupted, the economy will suffer. The current-account deficit, at $400 billion a year, is reaching disturbing proportions. America is living on debt, paying far more money than it earns offshore. Now, however, the fund influx is dwindling. In the first quarter of this year, inward portfolio investment dropped by 40 percent, or $93 billion, from a year earlier. Foreign investors are fleeing the U.S. market.