Over The Ears in Debt

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The obligations have been piling up for years in almost every cranny of the U.S. economy: Treasury bonds, corporate securities, household mortgages, consumer credit-card slips. Taken together, all the promissory pieces of paper have had a magical ability to help sustain one of the longest periods of economic growth in U.S. history. But as that expansion moves well into its 18th quarter, fears are rising about how long the magic can last. Suddenly, alarms are sounding louder than ever that those handy piles of debt are taking on the messy proportions of a potential crisis. Individuals, corporations and even Uncle Sam himself are, to put it bluntly, in hock as never before in history. To many concerned experts, the question is not whether but how much the mountainous burden of debt is threatening the economy and the future welfare of every American.

The nature and scope of the U.S. debt problem came under scrutiny last week at a meeting of TIME's Board of Economists in Manhattan. The consensus was that American debt levels, while still manageable, are reaching dangerous proportions. Even if the rate of debt expansion is substantially slowed soon, the total amount of the obligations will continue to increase to even more formidable levels. The costs of making payments on the debt will increase dramatically into the 1990s, leading to a significant slowdown in improvements in the U.S. standard of living.

An even greater peril, in the view of TIME's economists, is the effect of the debt burden on U.S. corporations and consumers in the event of recession. So extended are American businesses and individuals that the resulting bankruptcies and attendant hardships would probably be more severe than during any downturn in recent memory. Says Board Member Lester Thurow, an economist at M.I.T.: "You are going to have more personal defaults than normal, more corporate defaults than normal, more Third World debtor defaults than normal -- all of those dominoes tumbling at the same time."

The dominoes are not likely to fall in the immediate future, however. Looking at the economy's current performance, TIME's board members forecast a 2.9% growth rate in the gross national product during 1987. That compares with a 2.5% pace in 1986. The board's projection is even more optimistic than the average suggests, since it is based on the assumption that economic activity will pick up as 1987 progresses, ending the year at a 3.8% clip. Says Walter Heller, a University of Minnesota professor: "The winds of change are blowing our way."

Much of that expected rise in economic activity will be the result of the falling value of the U.S. dollar, which has declined 20% against the Japanese yen and 21% against the West German mark in the past year. Heller pointed out ( that the Reagan Administration's policy of allowing the greenback's value to fall against those currencies has finally begun to stimulate U.S. exports by making American products less expensive overseas. That may soon improve the distressing U.S. trade deficit, which reached $170 billion last year. Nonetheless, the trade statistics do not yet show a clear-cut trend. Figures released last week showed that the January deficit was $14.78 billion, which was $600 million lower than in November but a $4.1 billion increase from December.