Heavy debt load makes Americans vulnerable

Editor's note: Growing debt has long been a concern in the United States, from individuals buying on credit to Washington budgets. But many economists are now warning that runaway spending and borrowing have the nation on track toward a major economic crash. The second in a three-part series, this story looks at scenarios in which debt could cause a major economic setback.

NEW YORK -- Buy now, pay later: It's been the mantra of American consumers for decades.

The results are obvious in the ballooning balances on credit cards and mortgage loans, and in the mushrooming U.S. trade deficit, which reflects the nation's nearly insatiable appetite for cheap, imported goods.

Low interest rates, especially since the end of the 2001 recession, have fed the debt beast at home, allowing American consumers to accumulate nearly $11 trillion in debt as they buy more homes, more cars, more clothes, more dinners out. At the same time, foreign investment in the United States is helping to keep the dollar strong, which holds down prices on those imports that Americans covet.

But what would happen if interest rates suddenly weren't so benign, or if foreign governments, corporations and individuals stopped investing so heavily in America? Some analysts fear such actions could trigger doomsday scenarios in which the bills come due and Americans can't pay, with devastating consequences for the entire economy.

The Associated Press asked some experts to discuss what could burst the debt bubble in three areas that appear most vulnerable, and to offer a rebuttal from the perspective of people who believe that while the country may be in debt, it's not in danger.

Credit card crunch

The tool that has made it ever so easy for Americans to buy and buy and buy is the credit card. And buy they have.

Outstanding balances on credit cards have risen to more than $800 billion, or some $7,200 per U.S. household. That's the equivalent of three plasma TVs, or 24 iPod digital music players, or more than 1,200 Big Mac meals.

It's more than double the indebtedness of a decade ago -- and it doesn't include an additional $1.3 trillion in debt for cars, appliances and personal loans.

With the savings rate hovering near all-time lows, most consumers don't have reserves, and so they're vulnerable to an economic shock.

What if interest rates suddenly shot up, say 3 percentage points or 4 percentage points, requiring burdened borrowers to greatly increase the amounts they have to pay each month on their debt?

"It would undermine the housing market, and could quickly result in credit problems that would affect the entire (American) financial system," says Mark Zandi, chief economist at Economy.com, a forecasting firm in suburban Philadelphia.

Such an event isn't beyond the realm of possibility if global investors, for instance, lose confidence in the U.S. economy and quickly shift their money elsewhere, or if a terror attack riles financial markets.

Some American borrowers already are in trouble, contributing to a sharp rise in bankruptcy filings. Howard Dvorkin, head of Consolidated Credit Counseling Services Inc. in Fort Lauderdale, Fla., warns that many more could be capsized soon.

As the Federal Reserve continues to push interest rates higher, the rates on many of the nation's cards are going up in lockstep. Meanwhile, banks are raising minimum payments, in some cases doubling them. And starting in October, a new bankruptcy law will make it much harder for consumers to be relieved of their debt.

"You'll see creditors get more aggressive at collecting debt, the reason being that they can," Dvorkin says.

That will turn many borrowers into "the walking wounded," struggling to keep up with card payments and limited in what they can buy -- a massive drag on the U.S. economy.

Robert Manning, a humanities professor at the Rochester Institute of Technology and author of "Credit Card Nation," fears the rising debt burdens will have a tremendous social impact, too.

"We're looking at the possibility that millions won't be able to retire, that they'll have to work well into their 70s" as they juggle their debt, he says.

Skeptics don't see a big economic shock in the offing, arguing that doomsayers have warned for years that the sky is falling. Economy.com's Zandi says interest rates are most likely to go up at a measured pace, giving most consumers time to adjust to higher payments, and they may see their credit limits cut.

Still, much of the debt in recent years has been taken on by lower-income and lower-middle-income families, who borrowed aggressively to maintain their standard of living as wages stagnated.

"Going forward it will be harder for them to maintain their spending -- and their living standards," Zandi says.

Since the U.S. economy counts on consumer spending for two-thirds of its output, that translates to "living with slower growth" in the future, he says.

There have, of course, been any number of doomsday predictions in the past that didn't come true. But a number have.

Many Americans are too young to remember that the Great Depression was the result of a bubble bursting when a panic in the market caused the crash of stocks, real estate and commodities that had been bought by speculators with borrowed money.

More recently, in the late 1990s, investors bid the stocks of technology companies so high -- even those without any profits -- that prices couldn't be sustained and the market crashed in 2000, triggering a national recession. The stock market still hasn't fully recovered.

NEXT: In the world's second-largest economy, Japan, the attitude toward debt is quite different than it is in the United States.