U.S. ECONOMY KISS OF DEBT / THE WALL STREET JOURNAL ( HIGHLY RECOMMENDED READING )

HEARD ON THE STREET

SEPTEMBER 16, 2011, 5:15 P.M. ET.

U.S. Economy's Kiss of Debt .

By ROLFE WINKLER



Why can't the economy grow? It's the debt, stupid.

That is the reminder from the Federal Reserve's quarterly data dump. Added up, household, business and government debt now amounts to some $36.5 trillion, a new nominal record. And that figure excludes the government's unfunded liabilities for Medicare and Social Security.


This debt overhang remains a key problem for the U.S. economy because it limits growth drivers like consumer spending. Consumers who still face big mortgage payments and credit-card bills have less flexibility to increase spending on goods and services, which in turn keeps a lid on job growth.


To be sure, consumers have made progress. Total household debt relative to gross domestic product declined to 66% in the second quarter. That is down from a peak of 76% reached in early 2009, but remains far above the historical average of 37% dating back to 1951.


The federal government has stepped into the breach. Total federal debt outstanding, according to the quarterly report, is now 65% of GDP, a level not seen since the late '40s.


The huge amount of debt outstanding also limits the Federal Reserve's flexibility: Any attempt to kick up inflation to drive growth runs the risk of increasing long-term interest rates, which would make refinancing the debt mountain more difficult.


The story isn't new, but the sheer level of debt—and the fact that the Fed can't stimulate new borrowing by pushing rates any lower—is a stark reminder. Nearly three years after the onset of the financial crisis, the long slog of de-leveraging still seems to be in its early stages.


Copyright 2011 Dow Jones & Company, Inc. All Rights Reserved