Financial Fragmentation

Gross cross-border investment flows are falling across the major economies.

Americans, Chinese, and Europeans have curtailed their lending and investing abroad—while also selling commensurately fewer financial claims to foreigners. In 2021, the gross value of cross-border financial transactions involving the U.S., China, and the euro area was worth about $7.9 trillion. In 2022, that figure was just $2.8 trillion. U.S. data for the first three months of this year suggest that cross-border transactions volumes have continued to shrink. International financial transactions involving the world’s three largest economies are smaller relative to their combined output than at any point other than the trough of the financial crisis.

The drop is visible across asset classes. What follows is a brief summary of the most significant categories in the three largest economies.

The U.S.

America’s 2021-2022H1 balance of payments were characterized by two somewhat unusual properties:

• Massive amounts of loan borrowing by the nonbank U.S. private sector

• Massive U.S. purchases of foreign bonds, particularly corporate bonds

Both of these have since stopped.