The Asian Factor.

If Jeffrey Garten's warnings scare you, perhaps you shouldn't read this. But there are some very smart people who now worry that global conflicts could tip over the most dangerous imbalance in the world economy. For years now, foreigners have been willing to lend Americans all the money they could spend, allowing the richest nation on earth to live beyond its considerable means. The United States now borrows $500 billion a year from foreigners, who still, as a rule, believe America remains the most promising growth economy in the world. Japan is a mess, and Europe is sluggish. American consumers buying houses and cars are the only real engine for global growth. While Wall Street may be too risky, U.S. Treasury bonds look secure. The big question has been whether this lending train will come to a gradual halt, or crash, and why. If you think we're heading toward a dramatic answer--a crash inspired by anger over American action in Iraq--you have the right idea, but the wrong culprit.

The real answer depends in large measure on who, exactly, America's creditors are. That is changing. Over the past three years, total U.S. Treasury holdings have been shifting from Europe to Asia, as Japan's share has risen from 26 to 31 percent, and China's from 4 to 9 percent. The dollar has been falling, but would have fallen faster, says economist Paul Donovan of UBS Warburg, if Asian central banks weren't buying dollars to keep their export prices competitive in cheaper yen and renminbi. In the fourth quarter last year, China edged ahead of Japan to become the largest net buyer of U.S. Treasury bonds. Since the Asian powers are well removed from transatlantic tensions over Iraq, that conflict seems unlikely to affect their willingness to fund American debts.

However, the fact that China, for instance, is a fast-growing new ...