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The Financial Crisis and America's Capital Dependence on Japan and China

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Abstract:

In the Post-Bretton Woods financial system (1972-2009), the United States has been able to borrow heavily from savings-rich countries like Japan and China. Its access to international capital has allowed the US to cover years of extravagant spending and to enjoy unmatched levels of power and plenty. For lenders, like Japan and China, access to the huge US export market has stimulated aggregate demand, which, in turn, has facilitated economic growth, high rates of employment, infrastructure expansion, and technological development. Notwithstanding the mutual benefits, the massive scale of Post-Bretton Woods imbalances has placed the financial system under stress. Such macro-economic imbalances usually require a major rebalancing—either immediately through a financial crash or gradually through a “soft” landing. The financial implosion in 2008 constituted a crash landing. To arrest the steep slide into a possible world depression, most of the leading economies, including especially the United States, have taken bold monetary and fiscal measures. However, these expansionary measures will deepen deficits and generate strong inflationary headwinds while placing pressures on currency exchange rates. Following the 2008 financial earthquake and its wave of after-shocks, America's access to foreign capital is apt to become more restricted and increasingly expensive. This will erode one of the central structural sources of US power—its extraordinary fiscal flexibility, monetary autonomy, and global economic clout. With a weakened financial superpower, the world may become less prosperous, less stable, less predictable, and considerably more dangerous.

Document Type: Research Article

DOI: https://doi.org/10.1080/13439000902957616

Publication date: 2009-05-01

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