If we are to understand where we are, we must understand where we have been. This is particularly true if we are to escape from the huge fiscal deficits being run by many governments. These deficits are not the result of government stupidity; they are mainly a consequence of – and response to – private behaviour. We must not ignore this connection.

The difference between domestic savings and investment equals the current account of the balance of payments (itself the inverse of the capital account). Domestic savings and investment can be divided, in turn, between private sector and government. Private, government and foreign balances must sum to zero. But it is still possible to ask how they do so and, in particular, what behaviour drives the specific patterns and levels of activity we see. In the present crisis, asking that question is particularly revealing.

In the chart, I have looked at the principal high-income countries. To these I have added Spain and Ireland, since the “great credit bubble” of the 2000s affected both countries so deeply. I start with 2006, the year before the crisis began. In that year, two external surplus countries – Germany and Japan – were running private sector surpluses of close to 8 per cent of gross domestic product. The French private sector had a small surplus, as did Italy's. The UK, US, Ireland and Spain ran large private deficits, the last two being gigantic.