On Borrowed Time

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America's self-congratulations for its booming economy and its soaring stock market can get a bit tiresome. But for those of you secretly hoping the U.S. will stumble, there's a dirty little secret behind the past 15 years of prosperity: most of it has been paid for with borrowed money.

Consumer credit now totals almost $1.4 trillion and is growing at nearly a 7% average annual rate. More than 40% of that consists of revolving credit (mostly credit cards). By contrast, personal income has risen at a 5.8% rate over the same period and real disposable income has moved up at only a 3.9% rate.

U.S. consumers have become increasingly concerned about the rate at which they are piling up debt, and they tried to rein in their borrowing this Christmas season. But they can't hold back the tide. Personal consumption expenditures have been climbing nearly twice as fast as personal income in the past few months. And since consumer spending accounts for roughly two-thirds of the U.S. economy, that spending spree fuels a continuing boom.

One reason that Americans think they can afford to go on borrowing is that U.S. real estate and stock prices keep climbing higher, and that makes Americans feel richer. This so-called wealth effect boosts additional consumption, fattens corporate profits and pushes the stock market ever higher. It's a regular perpetual motion machine.

This credit cycle might be able to continue indefinitely if the people with the most assets did the bulk of the borrowing. But while nine out of 10 American adults use credit cards, it's the wealthiest who generally use credit most judiciously. They're the likeliest to pay off their balances promptly. The people who end up telling their troubles to debt counselors, however, aren't kids who are just starting out. They're typically married and in their late 30s, earn $30,000 a year and owe 10 creditors a total of more than $23,000, according to the National Foundation for Consumer Credit. And they're more likely to attribute their financial problems to poor budgeting or excessive use of credit rather than to big, unexpected bills or sudden job loss.

These financial problems aren't entirely the result of fecklessness. Consumer credit earns U.S. banks some of their easiest profits--and they market their plastic aggressively. When you can borrow money at less than 6% and lend it to consumers at anywhere from 14% to 20%, you can eat several percentage points a year in bad loans and still have spectacular margins.

The industry mails more than 2.3 billion credit card solicitations a year--or over two dozen per U.S. household. You might think that this tidal wave of card offers would saturate the potential market. But issuers keep coming up with innovative marketing campaigns that encourage consumers to keep signing up for more cards.

Eventually, of course, consumers will balk at further borrowing, no matter how clever the appeals. Some 43% of credit card users pay off their balances within a month. Another group carries balances they never entirely pay off but do manage to limit to less than $4,000. With all the interest and fees included, that costs well under $1,000 a year.

The big chunks of debt fall largely on the poorer half of the U.S. population. And the cost of this borrowing takes a real toll because buying something on a typical credit card and paying it off over three years, say, can add between 50% and 70% in interest to the original price. Considering that less affluent people may not have much in the way of financial assets and don't earn much more than they need to live on, they will be forced to stop borrowing at some point simply because paying their monthly credit card bills become too painful.

Even if many of these borrowers were heedless, the credit card issuers themselves would be forced to curtail their lending because of rising risks that overindebted borrowers would default, driving up the banks' loss rates on their credit card loan portfolios. So sooner or later the perpetual motion machine will have to slow down--or stop altogether.

There's only one thing that could postpone that day. If the U.S. credit card industry could gain access to affluent people in countries that have traditionally had underdeveloped consumer-finance sectors, there might be enough new potential borrowers without substantial debt to keep the machine running at full speed for a while longer. "U.S. credit card issuers are so technologically advanced that they'd have a head start over local competitors almost anywhere," says Michael Dean, senior director of the international credit-rating agency Fitch IBCA. But where could one find such a pool of untapped, high-quality borrowers--except maybe Europe?

Michael Sivy is editor-at-large for Money magazine. For more of his commentary, visit money.com on the Web.