In 2023, net total foreign capital inflows into all dollar assets, excluding cash, reached a record $1.1 trillion, according to the U.S. Treasury Department's calculations based on the TIC report, matching previous records of $1.1 trillion in 2006 and $1 trillion in 2007.
On a rolling 12-month basis, the trend hit $1.34 trillion in July 2023, surpassing the previous peak of $1.29 trillion in June 2007.
These figures are nominal, when adjusted for inflation, the growth appears more modest. Additionally, considering the dollar amount of asset growth over 15 years and equity market capitalization, which has increased nearly 3.5 times since 2007, the growth seems even more modest.
While relative comparisons might diminish the apparent significance, it is the trend that holds importance.
Structural Composition of Capital Inflows
Regarding the structure of capital inflows, $90 billion flowed into equities (including $80 billion in December), $304 billion into corporate bonds, $160 billion into agency securities, and $538 billion into Treasury bonds.
Inflows into Treasuries surged at the onset of the QE tightening cycle from April 2022 - nearly $1.1 trillion in net inflows over 1.5 years, marking a record.
Decline in International Capital Flows to the U.S. Since 2008
Since the 2008 crisis, international capital flows to the U.S. have significantly declined due to several factors:
- The collapse of cross-border financing and external debt accumulation (global external debt growth has virtually halted since 2009 compared to the aggressive expansion of 2000-2008).
- Key US allies experienced a domestic financing crisis, especially during 2010-2013, leading to a lack of resources for external expansion.
- Low dollar interest rates and minimal positive differential of dollar exchange rates against investors' currencies have discouraged international capital mobility.
- Financial de-globalization and fragmentation of the international financial system into blocs of countries loyal and adversarial to the US (resulting in money flowing away from China and oil exporters) have become more evident.
The COVID crisis (with the US experiencing it relatively mildly) and the Federal Reserve's faster tightening of policy compared to other central banks have significantly redirected international capital flows in favor of the US.
Conclusion
In conclusion, the record-breaking net total foreign capital inflows into dollar assets in 2023 highlight a significant trend in global finance. While nominal figures impress, adjusting for inflation and considering broader economic contexts reveals a more nuanced picture. Structural changes in capital allocation, particularly the rise in Treasury bonds amidst the QE tightening cycle, reflect evolving investor preferences. However, the overall decline in international capital flows to the U.S. since 2008, influenced by various factors, underscores the complexity of global financial dynamics. The COVID-19 crisis and the Federal Reserve's policies further reshape these trends, emphasizing the importance of understanding broader economic forces in interpreting capital flow patterns.