TO MANY OBSERVERS, the signposts of the late '80s point to the continuing decline of America and its economy. Persistent trade and budget deficits, the October stock-market crash, the emergence of Japan as the world's foremost financial power -- all are widely seen as harbingers of gloom:

"Our governing assumption," writes Los Angeles Times contributor Walter Russell Mead, "is that the decline {of America} will continue." Mead's 1987 book "Mortal Splendor" lays out a rationale for retrenchment, virtually conceding future economic preeminence to other nations, particularly in the Third World.

Lawrence Krause, senior fellow at the Brookings Institution, suggests that American leadership accept a "shift to Japanese hegemony" as Great Britain did when the United States surpassed it in the 1930s. "Japan is replacing the United States as the world's strongest economic power," Krause told the Joint Economic Committee a year ago. "It is in everyone's interest that the transition go smoothly."

However fashionable, such views reflect a profound misreading of both the historic strengths of the United States and the rapid changes now taking place in the rest of the industrial world. While a large portion of our intelligensia indulges in a sort of national death-wish, many leading observers abroad view the United States and its economy with respect and admiration.

"America has the material and spiritual requirements to be a world leader for many years," says Dr. Fuji Kamiya, influential social commentator and professor of economics at Tokyo's Keio University. "Vietnam may have been a major setback. For any other country it would have been fatal. It showed the reserve strength, the sokojikara {latent power} and youth of America."

America's sokojikara rests upon three pillars: the openness of its economy; the creative force of immigration; and the natural gifts of its broad continent. It is nowhere more evident than in the rapid transformation of the American economy. Despite the massive trade and budget deficits -- and despite suffering in the '60s and '70s from higher unemployment and lower growth than virtually any major industrial nation -- the U.S. in this decade has created more jobs and grown faster than most of its advanced competitors.

Led by an active entreprenurial sector, American firms have established world-wide leadership in scores of new industries -- from biotechnology, software and personal computers to entertainment and fast food. Entrepreneurs have also led the burgeoning industrial revival. While large firms lost 1.4 million manufacturing jobs between 1974 and 1984, those losses were virtually made up by positions created by 41,000 new industrial companies formed during that period. Companies with fewer than 250 employees -- which now make up some 42 percent of all manufacturing employment -- could constitute an absolute majority by the early 1990s.

These smaller firms, as well as some slimmed-down larger companies, have helped boost American productivity increases -- once among the lowest in the world -- into one of the fastest-growing. Investment in new industrial plant and equipment, generally slackening in both Japan and Western Europe, has been on the upsurge. And aided by the lower dollar, American industrial exports are now increasing at rates in excess of 15 percent annually.

Such signs of resurgence, however, often seem lost on the nation's public-policy, business and news-media estabishments. Many opinion leaders appear simply to have lost faith in America's "open system," with its uncontrolled access to capital, new business formations, bankruptcies and the other messy turbulence of free-market capitalism. Much like the Depression-era intellectuals who saw in European fascism or communism the nation's salvation, today's pessimists increasingly gravitate towards supposedly superior role models provided by more "closed" foreign systems. Even conservatives such as Kevin Phillips now openly call for a tough-minded "nationalist" business strategy roughly similar to the "neomercantilist business-government partnerships" of such politically conservative nations as Japan, Gaullist France, Korea, Brazil and Taiwan.

At the other end of the political spectrum, the loss of faith is even more pervasive. Robert Reich, seemingly oblivious to the largely unplanned entrepreneurial explosion outside his Cambridge office, insists the best blueprints for America's future lies in corporate offices in Tokyo, Bonn and Paris. Moreover, he wishes to refashion America's basic economic ethos, particuarly what he calls "the myth of the self-made man" -- the central leitmotif of the American economic dream. Because he "short-circuits progress", Reich argues, the "opportunistic individual" is no longer appropriate to "our place in the world."

And yet from Thatcher's England to Takeshita's Japan, emulating America's entrepreneurial explosion has become a fundamental goal of policy-makers. "America shares equally in the crisis that afflicts all developed countries," notes Austrian-born management expert Peter Drucker. "But in entrepreneurship, in creating the different and the new, the United States is way out in front."

America's sokojikara also owes much to immigration. Over the past decade the United States has accepted more legal immigrants than the rest of the world combined. They have sparked economic growth wherever they have chosen to settle. Hispanics have turned once-sleepy Miami into an important international business center and provided half the workforce that has made Los Angeles the nation's premier industrial center. Asian workers and engineers predominate in both Silicon Valley -- where over 10,000 ethnic Chinese engineers now work -- and Southern California, which has the nation's largest concentration of high-technology industries. "Without the influx of Asians," admits Robert Kelley, president of the Southern California Technology Executives Network, a coalition of 170 high-tech firms, "there would not have been the sort of explosion you had in places like Orange County."

Perhaps most important, immigrants may help to save the United States from the demographic decline now threatening both Japan and Europe. Adamant in their reluctance to accept new immigrants, some Western European countries already are beginning to lose population, with demographers projecting that West Germany's population could be cut in half by 2050. Even traditionally Catholic France and Italy suffer from rapid aging and declining birthrates. "In demographic terms," notes French Prime Minister Jacques Chirac, "Europe is vanishing."

In the decades ahead, Japan will begin to share that decline. With virtually no immigration, Japan's population is aging even more rapidly than those of most European states; by the end of the century Japan's elderly will account for nearly one-quarter of the population -- almost twice the percentage projected for the U.S. By early next century, nearly two in five Japanese will be collecting pensions, compared to only one in four here.

Not all Americans, of course, view immigration as an advantage. Some, such as former Colorado governor Richard Lamm, fear that "unassimilated immigrants" from Asia or Latin America could "contaminate" the national culture. And certainly much must be done to assist immigrants in education, language training and other social services. But recent studies by the Rand Corporation and others show that immigrants have contributed far more to the economy than they have taken in government services. Prof. Kamiya believes that they will constitute an increasingly critical "stimulus" to America's ability to compete with other advanced industrial countries. "Amazingly, the U.S. continues to absorb new Mexican and Vietnamese immigrants with equanimity," says Kamiya. "European civilization doesn't have that reserve. Neither does a small vessel like Japan."

One other crucial American advantage is the land itself. Our prime economic competitors -- Japan, the newly industrializing nations of Asia, and Western Europe -- are fundamentally land- and resource-poor. Many of them, notably Japan and Germany, spent much of the first half of this century attempting to achieve what the Japanese call tairiku, or continental power, ultimately failing at a terrible cost.

The United States, on the other hand, possess 30 times Japan's arable land, 1300 times its oil reserves, 327 times the coal deposits and 170 times the reserves of iron ore. Such differences, along with an increasing edge in population, explain why many Japanese, even with their huge trade surpluses and massive financial resources, still regard the constant carping from Washington and New York as something akin to the whining of a spoiled brat. "Our common perception of American complaints," says Mikio Kato, a leading Japanese internationalist, "is to see a rich person complaining. Americans have become too lazy, now taking one-month-long vacations. Yet the United States has all the resources it needs to revive."

"There are thousands of areas in the U.S. where you can build a hotel and do some marketing and develop it into a tourist area," explains Yumi Kobayashi, a California consultant to many large Japanese financial institutions. "There are no unexploited areas in Japan -- no unturned rocks."

Perhaps nothing so illustrates the fundamental strength of the American economy as the flood of foreign investment pouring in from Asia and Western Europe. A growing body of sentiment -- exemplified by the attention accorded Susan and Martin Tolchin's forthcoming book, "Buying Into America" -- sees in the massive movement of capital a threat to American self-determination. Yet as Karl Marx observed over a century ago, the investments of capital-rich nations usually end up providing "the secret foundations" for the emergence of new, and more powerful, economies. Venice, for instance, supplied the capital that underlay the emergence of Holland which then in turn financed the rise of England, its greatest rival.

Starting in the early 19th century, European, largely British, capital played a similar role in American economic development. Alexander Hamilton, our first Secretary of the Treasury, recognized this when he wrote that foreign investment, instead of "being viewed as a rival . . . ought to be considered as a valuable luxury." This "luxury," ultimately, financed the industrial growth of America, by 1900 accounting for at least one-third of all the nation's rail securities. Even Andrew Carnegie's fortune owed much to his role as agent for US firms placing bonds with British and German financiers.

With the exception of a few decades following each World War, America has remained a major capital importer. In fact, periods of heaviest foreign investment usually coincided with the most dynamic expansions, particularly in the late 19th and early 20th centuries when American industrial prowess overcame that of all European competitors.

After several decades of American capital flight to other parts of the world, the same process is now repeating itself. Faced with declining populations, high unemployment and anemic economic growth, European investors again consider the United States a good economic bet. A 1984 poll of European executives, before the devaluation of the dollar made investment more attractive, found that 45 percent preferred the U.S. as their first choice for expansion -- far ahead of second-place Germany (9 percent) and all of Asia.

Even investors from the fastest-growing economies in the world -- the industrializing nations of Asia -- are also voting American with their dollars. A recent poll of Hong Kong real-estate investors, who now are sending out an estimated $3 billion annually outside the Crown Colony, found nearly three-quarters planing to invest in North America, particularly Los Angeles, San Francisco and New York. Similarly, a survey of Singapore's five leading venture-capital funds revealed that four out of five named the United States as the preferred locale for investment in growth companies.

With over $60 billion in U.S. dollar reserves -- the second-largest such dollar hoard in the world -- Taiwan is also becoming a major source of American investment capital. Over the past few years Taiwan's business elite has been quietly pouring their resources, sometimes in direct violation of explicit government controls, into hotels, shopping malls and small industrial enterprises. Two dozen Taiwan-backed banks -- spread from Los Angeles to San Francisco to New York -- have opened here in recent years, most of them seeking to back entrepreneurial ventures.

"The government {on Taiwan} might not like it, but the reality is that all the money is coming to America," says Anthony Chien, a 17-year Citicorp veteran and now president of Cal-Eastern Financical Services, an investment firm set up for wealthy Taiwanese investors. "They come here for education. But the more they are exposed, they see the possibilities in business are almost limitless. You don't see that horizon in Taiwan."

But nowhere is the appeal of America stronger -- or the stakes higher -- than in Japan, which with seven of the world's 10 largest banks now stands as the predominant financial power. Like the British in the late 19th and early 20th century, who held an analogous hegemony over world financial markets, many Japanese do not regard their economy as unstoppable juggernaut, despite the current consumer boom. A recent survey by the Economic Planning Agency of the 1600 companies listed on the Osaka and Tokyo Stock exchanges -- the cream of Japan's economy -- rated as "poor" the prospects for their current lines of business. No wonder that by 1985 the U.S. was garnering an estimated 44 percent of Japan's overseas investment.

Indeed, some leading Japanese experts, such as Hiroshi Takeuchi, chief economist of Japan's Long-Term Credit Bank, are deeply concerned that these outflows -- with bonds, securities and direct investment ranging into the billions of dollars -- signal a long-term trend toward renewed American economic preeminence. He believes Japan's wealth is coming to America because it represents the best potential return on investment. The fundamentals behind America's economic sokojijara -- its entrepreneurial dynamism, immigration-induced population growth and natural resources -- are simply more appealing to Japan's increasingly internationalized financiers than options elsewhere, including at home. Takeuchi argues that only "a sort of Hitler regime", willing to impose harsh controls on capital outflows, ultimately can prevent Japan's financial giants, like the British of a century ago, from simply handing over the keys of future ascendency to its greatest industrial competitor.

"United States society is very strong, with your immigration from other countries. You have the scale and the resources that we simply will never possess," says the economist sadly in his spartan office. "The Japanese role will be to assist the United States by exporting money to rebuild your economy. This is evidence that our economy is fundamentally weak while yours is fundamentally strong."

Joel Kotkin is West Coast editor of Inc. magazine. Yoriko Kishimoto is a managing principal of Japan Pacific Associates, a consulting firm in Palo Alto. They are co-authors of "The Third Century: America's Renaissance in the Asian Era," to be published this summer.