The financial crisis is over; yet a durable recovery is not yet in place. Unprecedented support for the financial sector, along with massive fiscal and monetary stimulus, has allowed the world economy to emerge from the crisis. This has been true not only in the high-income countries but also in China. The question is how to withdraw that stimulus and so rely on renewed private demand.

It is neither likely nor desirable that much of the recovery in private demand will come from the US or other erstwhile deficit country. That could only happen with a renewed surge in private borrowing. But in the US, UK and similarly affected countries, the task is to deleverage the private sector, not increase indebtedness further. The private sector will need to reduce its liabilities by spending less than its income over a sustained period. The question is what might offset such frugality.

In the short to medium term, we already know the answer: public sector borrowing. On the basis of forecasts from the Organisation for Economic Co-operation and Development, the US government will run a general fiscal deficit of about 11 per cent of gross domestic product this year, while the current account deficit will be about 3 per cent of GDP. By definition, this means that the private sector is running a financial surplus of 8 per cent of GDP. This is a massive swing from 2007, when the US private sector ran a deficit of 2.4 per cent of GDP.