How Was the U.S. Current Account Deficit Financed In 2022?
Foreign banks and global hedge funds played an outsized role at a time when many reserve managers were selling.
Foreigners provided even more financing to American consumers and investors in 2022 than they did in 2021. On the surface, much of this financing seems to have come from global hedge funds and banks headquartered in the other G7 economies. But since those countries were also experiencing net financial inflows from abroad, the ultimate sources of financing must have been elsewhere.
The U.S. government budget deficit was smaller than in prior years relative to national income and undistributed corporate profits were relatively high compared to net capital expenditures. But this was offset by elevated levels of residential investment spending, residential depreciation, and consumer spending.
The corresponding U.S. current account deficit averaged $247 billion each quarter in 2022Q1-Q3, up from $212 billion in 2021.1 Meanwhile, net U.S. investment abroad in stocks, corporate bonds, and direct investment assets rose from $107 billion each quarter in 2021 to $126 billion/quarter in 2022Q1-Q3.
That in turn corresponded to $373 billion in net financing from the rest of the world each quarter in 2022, on average. This financing mostly took the form of foreign purchases of debt issued by the U.S. Treasury ($136 billion/quarter), foreign purchases of debt backed by U.S. government agencies ($41 billion/quarter, mainly from Fannie Mae and Freddie Mac), inter-office loans to U.S. branches of foreign banks ($65 billion/quarter), and loans from foreigners to U.S. nonbank financial institutions and private companies ($49 billion/quarter).