Last Looks at the Pre-War World (3): The Return of "Exorbitant Privilege"?
Americans financed large trade deficits as well as large net purchases of valuable foreign investments in 2021 by printing money and by issuing low-yielding safe assets.
Foreigners financed an unprecedented boom in U.S. spending on goods, services, stocks, and corporate bonds in 2021—and they did so more or less for free.
The $861 billion U.S. trade deficit and the $455 billion net U.S. investment abroad in risky assets was matched by net financial inflows of more than $1.3 trillion from abroad. Essentially the entire net inflow was covered by the issuance of ultra-low-yielding deposits, repos, physical currency, and U.S. Treasury debt.
Even more remarkably, this occurred during a broad-based global recovery and during a surge in U.S. inflation that should have made dollar-denominated cash equivalents singularly unattractive. If there were ever such a thing as “exorbitant privilege”, this is what it might look like.
The limited data we have so far suggests that at least some of the key patterns have persisted into the first quarter of 2022.
The Uniqueness of 2021
The 2021 U.S. balance of payments picture was decidedly different from the recent past.
In 2020, Americans financed their comparatively modest spending by selling far more stocks and corporate bonds to foreign investors than they accumulated abroad. These are higher-yielding assets that represent claims on real productive capacity. Returns on both U.S. stocks and U.S. corporate bonds were strong in both 2020 and 2021, which means that the financing that covered the U.S. current account deficit in 2020 came at a real cost to Americans. Foreigners sold modest amounts of U.S. Treasury and agency debt over the course of 2020, while foreign investment in U.S. cash and equivalents was essentially matched by American outward investment.
In the years between the global financial crisis and the pandemic, the current account deficit was far smaller and net investment abroad in risky assets was often negative, or at least inconsistent across asset classes. Going further back, before the global financial crisis, the current account deficit was extremely large—and it was financed in large part by selling corporate bonds1 and stocks to foreign investors, as well as Treasury debt and other lower-yielding assets.