Low Inflation Is Making Debt Even Tougher To Pay Off

Private nonfinancial debt edged up just 2% over the past year--the smallest rise on record. And according to economist Bruce Steinberg of Merrill Lynch & Co., consumers and businesses are likely to keep using less credit for some time, slowing the recovery.

During the 1973-75 and 1980-82 recessions, notes Steinberg, the real value of private nonfinancial debt fell significantly--by 3.4% and 4.3%, respectively. This time around, though, real private debt, which soared during the 1980s, is down only 2.3% from its 1990 peak.

During past recessions, explains Steinberg, high inflation bailed out borrowers by eroding the real value of their debt. In this cycle, debtors are enjoying no such luck. "Absent the quick fix provided by inflation," he says, "the current process of reliquification promises to be a drawn-out affair."