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Higher income inequality in developed countries is associated with higher domestic and foreign indebtedness

Economists have long worried about the growing chasm between countries that borrow heavily internationally and those that dish out the loans. They call it global current account imbalances and, especially since the onset of the global economic crisis in 2007, there has been concern that global markets could be destabilized were there a run on the currencies of those countries that pile up huge deficits. That hasn’t happened, at least so far. In fact, the biggest borrower of all, the United States, is viewed mainly as a safe haven by lenders.

But there is another, domestic dimension to the pileup of international obligations. Domestic debt rises too and could reach unsustainable levels that could lead to domestic financial crises.