Experts warn that heavy debt threatens American economy

You owe $145,000. And the bill is rising every day.

That's how much it would cost every American man, woman and child to pay the tab for the long-term promises the U.S. government has made to creditors, retirees, veterans and the poor.

And it's not even taking into account credit card bills, mortgages -- all the debt we've racked up personally. Savings? The average American puts away barely $1 of every $100 earned.

Our profligate ways at home are mirrored in Washington and in the global marketplace, where as a society we spend $1.9 billion more a day on imported clothes and cars and gadgets than the entire rest of the world spends on its goods and services.

A new Associated Press/Ipsos poll finds that barely a third of Americans would cut spending to reduce the federal deficit and even fewer would raise taxes.

A chorus of economists, government officials and elected leaders both conservative and liberal are warning that nonstop borrowing could bring fiscal disaster -- one that could unleash plummeting home values, rocketing interest rates, lost jobs and threats to government services ranging from health care to law enforcement.

David Walker, who audits the federal government's books as the U.S. comptroller general, put it starkly:

"I believe the country faces a critical crossroad and that the decisions that are made -- or not made -- within the next 10 years or so will have a profound effect on the future of our country, our children and our grandchildren. The problem gets bigger every day, and the tidal wave gets closer every day."

Undeniably, borrowing isn't all bad -- easy access to money has been a critical tool in building America's businesses, from mom-and-pops to multinationals. Areas like Las Vegas are sprawling with new homes that will be purchased with borrowed money. But something has changed.

An epidemic of American indebtedness runs from home to government to global marketplace.

To examine it, let's start at home.

Americans used to save, but no longer. The savings rate rose and fell in the post-World War II era, up to 11 percent, down to 7 percent. But in the last few years, savings have plummeted: to just 1.8 percent last year, nearly to zero in the last few months.

The lack of savings is mirrored by a rise in debt. In 2000, household debt broke 18 percent of disposable income for the first time in 20 years, meaning debt eats almost $1 in every $5 American families have to spend after they get past the bills that keep them fed and housed.

In lieu of savings, Americans have been taking comfort in the soaring value of their homes. But there's a vigorous debate over whether the housing boom is becoming a bubble that will burst.

"I see people younger than me with comparable jobs that drive new vehicles and have a boat and mortgage and things," said Jo Canelon, a 46-year-old social worker in Statenville, Ga. "And I just wonder about their debt."

Canelon sees echoes in the rise of obesity: a pervasive I-want-it-now attitude no matter what the consequences. The American people seem to want the best of both worlds -- tax cuts and government services -- while they hope the dollars sort themselves out.

An Associated Press/Ipsos poll of 1,000 adults taken July 5 to 7 found that a sweeping majority -- 70 percent -- worried about the size of the federal deficit either "some" or "a lot."

But only about a third, 35 percent, were willing to cut government spending and deal with a drop in services to balance the budget. Even fewer -- 18 percent -- were willing to raise taxes to keep current services. Just 1 percent wanted to both raise taxes and cut spending. The poll has a margin of error of 3 percentage points.

A few years ago, government finances were the strongest they had been in a generation. But it didn't last. The budget surplus of $236 billion in 2000 turned into a deficit of $412 billion last year. The government had to borrow that much to cover the hole between what it took in and what it had to spend; a difference that's called the federal deficit.

Blame the bust of the dot-com boom, the ensuing recession, President Bush's federal tax cuts, the Sept. 11, 2001, terrorist attacks and the subsequent wars in Afghanistan and Iraq.

Still, the federal deficit isn't as big, in proportion to the size of the economy, as it was at times under President Reagan. Some note things are getting better: The latest reports project a deficit of $331 billion for 2005, nearly $100 billion less than expected. Outstanding debt -- the amount of securities and bonds that must be repaid -- is far below what it was in the early 1990s.

But bigger worries lie ahead.

The nation's three biggest entitlement programs -- Social Security, Medicare and Medicaid -- make promises for retirement and health care that carry a huge price tag that balloons as the population grows and ages.

Add it up: current debt and deficit, promises for those big programs, pensions, veterans health care. The total comes to $43 trillion, says Walker, the nation's comptroller general, who runs the Government Accountability Office. That's where the $145,000 bill for every American comes from.

The dangers are clear to Felicia Brown in Saginaw, Mich. It's the leaders who ignore them, says the cashier and mother of three: "We're led off on this belief that we should buy, buy, buy. ... We're not saving anything."

Some people, however -- including economists -- think the picture isn't so gloomy.

Ben Bernanke, who recently left the Federal Reserve Board to serve as Bush's top economic adviser, has argued that the problem is not with the United States. The trouble lies overseas, where people want to save rather than invest or spend their money. While the federal budget needs to be balanced, the key is to encourage other countries to create more economic activity, he says.

The overseas equation gives many other economists the biggest scare.

The trade deficit -- the difference between what America imports and what it exports -- is the highest it's ever been, both in absolute numbers and in comparison to the size the economy.

As a society, Americans are on track this year to spend $680 billion more on foreign goods like Chinese-made clothes and Scandinavian cell phones than overseas buyers do on American products. The crush of arriving, Asian-made goods recently spurred the Port of Los Angeles to switch to 24-hour operations.

Nearly two decades ago, the country fretted over a trade imbalance equal to 3.1 percent of the overall economy, or the gross domestic product. It's more than twice as big now, roughly 6.5 percent.

Here's how economists, from former Federal Reserve chairman Paul Volcker to analysts at the International Monetary Fund, explain the danger that creates:

* Americans go into debt to live a life beyond their means, spending borrowed money to buy goods, many from overseas.

* Government provides more services than it can afford to, and goes into debt to cover the gap.

* Foreign banks increasingly cover that debt by buying it, in the form of U.S. Treasuries, which helps keep interest rates low and keeps American consumers buying.

Experts say the relationship is unsustainable. It could all come crashing down if foreign banks reduced their investment in the dollar, says Nouriel Roubini, an economics professor at New York University.

Economists and business leaders are closely watching China's decision last month to uncouple the value of its currency, the yuan, from the dollar and tie it instead to a basket of different currencies. The move could make the dollar's position less exposed to a quick shift by international investors -- or it could spur those investors to look elsewhere and leave the United States' position more precarious.

So could any of a number of possible economic shocks -- even greater hikes in oil prices, a major terrorist attack, another war.

In the end, Roubini, Walker and others say, disaster is still avoidable, but it's going to require the American people and its leaders to clean financial house -- to reduce the federal deficit and the trade deficit.

If not, the future poses some frightening what-ifs:

What if the dollar plummets, do stocks follow? What if interest rates soar, what happens to homeowners and home values? How would government keep all its promises?

OK, now back to you. No one's asking you to write a check to cover that $145,000, not yet. But the pressures are building around the world, in Washington, and in America's homes to straighten out our finances.

"We're living beyond our means," Roubini says, "and we have to get our act together."

NEXT: Doomsday scenarios in which debt could derail the economy.