By Martin Wolf

Will sterling follow the US dollar? As Willem Buiter pointed out last week (The silver lining in sterling’s decline, January 4), this is highly likely. Movements in exchange rates are, to put it mildly, unpredictable. But this one ought to happen. It should also be welcomed. This possibility was, indeed, why the UK had to keep out of the eurozone.

Like the US, the UK has had buoyant credit growth, huge rises in house prices, low private and national savings and a sizeable current account deficit. Like the US, it also absorbed the surplus savings of much of the rest of the world in the 2000s. It is, in short, one of the canonical “Anglo-Saxon” economies.

Yet, in many respects, the UK position is worse than that of the US. The run-up in UK house prices, for example, was much bigger than in the US. On almost any measure, housing valuations and household indebtedness are still more extreme. To take one example, at the end of 2006, household mortgage debt was 126 per cent of disposable income, against a mere 104 per cent in the US.

Moreover, the UK’s current account deficit, at 5.7 per cent of GDP in the third quarter of 2007, was bigger than that of the US. Indeed, it was bigger even than it seems. As Andrew Smithers of London-based research company Smithers & Co argues, the deficit is significantly understated by current statistical conventions. Retained earnings of direct investment are included in data on investment income, but this is not the case for portfolio investment. Since a high proportion of UK-based multinationals are owned by foreign portfolio investors, this exaggerates the UK’s net investment income. The UK’s true current account deficit may have been close to 7 per cent of GDP.

The remainder of this column can be read here. Debate from our panel of economists appears below.