The United States is extremely dependent on foreign capital inflows – at least $220 billion in net foreign capital inflows per quarter is required to keep the currency and financial system functioning.
The average quarterly current account deficit was $104 billion in 2017 - 2019, $215 billion in the last three years, and the same amount in the last 12 months.
The Federal Reserve's Role
The Fed's faster pace of monetary tightening was due to the need to maintain a positive interest rate differential (rates in dollars are higher than in other countries' currencies).
Investment Income
The quarterly average primary income surplus (mostly investment income) declined from $63.4 billion in 2017 - 2019 to $37.3 billion in 2021 - 2023. The Fed's more aggressive monetary policy and the modification of the IIP balance sheet have resulted in a gap of over $100 billion in investment income on an annualized basis.
Trade Deficit
The U.S. trade balance (goods + services) has deteriorated significantly. The average quarterly deficit in 2017 - 2019 was $138 billion, in 2021 - 2023 the deficit has widened to $214 billion, and $208 billion in the last year. However, there is an improvement in 2Q 2023 vs 2Q 2022 - $208 billion vs $258 billion.
The average quarterly goods trade deficit widened from $211 billion in 2017 - 2019 to $275 billion in 2021 - 2023, but there's a slight improvement over the year - $274 billion vs $311 billion. The main problem is the outpacing growth in imports vs. limited export potential.
Foreign Investment in the U.S.
The bulk of foreign investment in the U.S. is in portfolio investments involving less than 10% ownership in the issuer of securities.
Since 1996, the net balance in direct investment in the U.S. has been around zero, i.e., foreign direct investment by U.S. residents with an accumulated total of over $7.5 trillion is balanced by comparable foreign inflows of $7.45 trillion.
Direct investment intensity has increased since 2020. The average quarterly net increase in direct investment by US residents was $33 billion in 2017 - 2019 and over $100 billion for the last three years, while non-residents invested $76 billion in 2017 - 2019 and around $104 billion in 2021 - 2023.
The intensity of portfolio investment has also increased. US residents invested an average of $76 billion per quarter in 2017 - 2019 in the global market, with fintech flows rising to $117 billion in 2021 - 2023. However, foreign asset purchases have been virtually non-existent over the past year.
As a result, net portfolio investment has grown more than six times from $35 billion average quarterly investment in 2017 - 2019 to $215 billion in the last year!
With the cumulative total since 1996, over $9.2 trillion has flowed into portfolio investment and over $1.5 trillion since the beginning of 2020.
Net inflows have picked up substantially in other investments - $3.8 trillion in accumulated inflows since 1996 and over $1.2 trillion since 2020, where most of the inflows are in currency and deposits, and interestingly, in lending. The residents borrow more in other currencies than foreigners do in dollars.
Conclusion
In conclusion, the significant dependence of the US on foreign capital inflows to support its currency and financial system is manifested in a substantial current account and trade balance deficit. The Federal Reserve's efforts to maintain a positive interest rate differential have played a decisive role in this dynamic. Despite the pickup in direct investment and significant growth in portfolio investment, these trends need to be monitored closely, especially given recent changes in investment patterns. The U.S. continues to attract foreign investment, but the changing economic environment underscores the importance of prudent fiscal and monetary policies to ensure economic stability and mitigate potential risks associated with dependence on foreign capital.