A current account balance is, by definition, the gap between savings and investment. The UK's record deficit means our investment exceeds savings. But we can put this the other way round: it means that the rest of the world has a big excess of savings over investment. It is this, alongside factors such as post-crisis risk aversion and quantitative easing, that has caused bond yields to fall.
Of course, the global savings glut and drop in real interest rates is an old story. It's been going on since the late 1990s. But the details have changed recently. In the early 2000s, the glut mainly reflected export-led growth and big current account surpluses in Asia. While this is still part of the story, another player has emerged: Germany. The IMF expects that its current account surplus this year will be almost as big as China's, at $292bn against $296.4bn.
This poses two dangers.
One, says Florian Baier at Fathom Consulting, is that it is depressing growth across Europe. The resolution of the euro area's debt crisis requires a narrowing of national imbalances, with the south being net savers. This process would be helped if Germany sucked in more imports. That it is not doing so means the post-crisis adjustment is occurring in a more deflationary manner than is necessary - through austerity in the south rather than strong demand in the north. The UK is a victim of this: weak demand in Europe is depressing our exports. 60 per cent of our £125.4bn trade deficit last year was with the eurozone.
Secondly, says Russell Jones at Llewellyn Consulting, low yields on safe assets are causing some investors to seek out riskier ones, just as a "reach for yield" in the early 2000s led them to pile into mortgage derivatives with disastrous consequences. This is increasing financial fragility.
Germany "has brought nothing but ruin to Europe", says Jorg Bibow at the Levy Economics Institute in New York. He proposes that Germany leave the euro to improve the rest of Europe's competitiveness.
This isn't going to happen anytime soon. In the meantime, though, the UK is paying the price of German "prudence". In recent years, this price has been weak export markets. But it might still become a nastier one. Anything that increases global investors' risk aversion might make them less willing to hold UK assets, and this might trigger a fall in sterling and in UK asset prices.
