Will Hutton has, inadvertently, provided a case for fiscal austerity. He writes of our record external deficit and deficit on net investment income:

If these trends continue for another 10 or 15 years the interaction with our growing trading deficit - we import a great deal more than we export - will eventually make the scale of our international debts and income flows abroad insupportable. There will have to be a massive national belt-tightening along with the imposition of controls of capital to stop a runaway sell-off of what will be valueless pounds. The curtain will come down on an era of amazing economic fecklessness.

Before seeing why this claim might justify tighter fiscal policy, let's just strengthen Will's argument in three ways:

- The UK's net foreign liabilities are now equivalent to 25% of GDP - their largest since records began in the 70s. Whilst this is roughly the same as Australia's, the US's or France's, the only major countries with significantly bigger liabilities are either those that ran into a big financial crisis because of their overseas debts (Greece, Spain) or poor countries for whom high liabilities represent FDI from overseas to take advantage of their decent long-term growth prospects. The UK is not in the latter category.

- A current account deficit, by definition, means domestic investment exceeds domestic savings. This can be a sign that bank lending is growing faster than deposits - which might be a warning of an impending financial crisis. Is it really an accident that the countries which suffered most in the Great Financial Crisis all had big and persistent deficits - Greece, Spain, Ireland, US and UK?

- We can't rely upon a fall in stering to eliminate the deficit: net exports just aren't very sensitive to exchange rate changes.

Herein, then, lies the case for austerity. A tighter fiscal policy would - in the absence of 100% crowding out - raise national savings and thus reduce the deficit. The bigger the fiscal multiplier, the more it does so - because there's a bigger drop in aggregate demand and hence imports. In this sense, fiscal austerity imposes hardship now in order to prevent a "massive national belt-tightening" in future.

I suspect Will does not want to reach this conclusion. And there's a good reason why he shouldn't. The UK's current account deficit is a symptom of the global savings glut and secular stagnation. By definition, the UK's deficit means that the rest of the world's domestic savings exceeds their investment. Foreigners are buying London houses and British businesses because they can't find sufficient productive investments at home.

One thing tells us this is a better way of regarding our deficit than the "amazing fecklessness" Will describes. It's that foreigners are happy to lend to us. Since early 2010 sterling's trade-weighted index has risen 15% and ten year gilt yields have fallen faster than US yields.Neither would have happened if the UK were in a desperate fire-sale of assets to fund profligacy.

Now, I don't say this to mean that the deficit is not a problem. Given the lack of global capital mobility, it is. As Sushil Wadhwani once said (pdf):

It is possible that the current account only matters some of the time. Casual observation suggests that countries with a current account deficit can have a currency that stays strong for a surprisingly long period, until, sometimes, there is an abrupt adjustment.

This might be an example of what Sornette and Cauwels call "creep": things can look robust until they suddenly collapse.

Instead, the question is: must we do something about the deficit now? I suspect perhaps not. Insofar as the deficit is partly the counterpart of high savings and weak demand in the euro area, we should wait until those problems are diminishing before trying to reduce it ourselves.