America finances itself

After publication of the US portfolio flow figures for November, the data for last year are now almost complete. Even if the December numbers are still lacking, it is certainly not too early for a first glance at the trend for the year as a whole. Two things catch the eye: 1. Capital inflows from abroad have clearly ebbed compared with the prior year; 2. Flows of capital being repatriated have more than doubled. In 2018, this ensured the USA a very sound net capital inflow, although this should not delude us into ignoring the fact that it is currently first and foremost American investors who are having to finance the current account deficit.

The US equity market, which in the first decade of the 21st century could seemingly not put a foot wrong, saw a significant volume of foreign capital withdrawn in 2014 for the first time in its history. While in 2017 there were signs of a recovery, things plummeted again significantly last year. Foreign investors slashed their exposure to US shares by no less than USD 110 billion. Their dwindling confidence in corporate America was also to be seen in the clear drop in demand for US corporate bonds. American companies that in 2017 had benefited from a total influx of USD 250 billion from abroad saw an increased outflow of capital in 2018, with almost USD 50 billion quitting US shores. While US agencies and US Treasuries both recorded positive developments, these did not suffice to offset the downward trend in the corporate sector. Above all the ongoing meagre (foreign) demand for US Treasuries bears considering in detail, as the US government debt will increase appreciably again in the coming years. As with the US equity market, the US Treasuries market has for several years now had to contend with foreign demand evaporating. Following a catastrophic 2016, when foreign investors shed US Treasuries to the tune of no less than USD 326 billion, demand has admittedly picked up again slightly, but remains very minor (2017: USD 20 billion; 2018: USD 80 billion). This is mainly due to the fact that official investors sold off no less than USD 880 billion in US Treasuries over the last four years.

Despite the diminishing foreign demand, the USA booked an extremely robust net capital inflow of USD 480 billion last year. This was above all the result of a massive influx of repatriated funds. Ever since 2015 US investors have been bringing capital back home, but last year this trend hit a new temporary high; indeed, the repatriated flows appreciably exceeded foreign demand for US securities last year. It is the liquidation of US holdings in foreign bonds that has been dominant in this regard, totalling USD 1.2 trillion over the last five years. One might suspect that a portion of that capital has now found a new home – back home in the US bond market. While the proportion of official foreign investors in the US Treasuries market has fallen since early 2015 from 34% to 26%, the share of local investors (excluding the Fed) has soared from 24% to 40%. It is therefore predominantly repatriated US capital that is now financing the US current account deficit. This can certainly not constitute a permanent solution, as the total portfolio of US investments abroad that could be brought back home is by no means infinitely large.

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