Too Much Credit Like Too Much Candy

"Don't eat all that candy – it'll make you sick!" Ah, yes, the fond memories of your little brother throwing up after bingeing on his Halloween haul.

Here's an idea: Suppose that this Halloween we adults turned the tables and went trick-or-treating instead of the kids. And imagine that someone dressed up like a banker wearing an Alan Greenspan mask opened every door we knocked on – and handed out credit instead of candy. Once our sacks were full, would we behave any better than our little brothers did?

Judging from statistics, most of us would unwrap our credit goodies right away.

"Ahhh, just a few pieces before bedtime, Mom, please?"

Some of our goodies would go to help consolidate old credit card debt, sure, but the candy keeps calling us back. Next, maybe some new clothes and sports gear. Mild tummy ache with the first finance charges? The candy sack keeps beckoning. That cruise to the Bahamas? Sure, why not? It's the holidays. More finance charges. Full yet? No way! That 46-inch plasma TV? Just gotta have it.

Eventually it happens: A full-blown bellyache sets in, and we end up acting just like our little brothers. But since we're big girls and boys now, we don't purge by paying homage to the porcelain god. No, we do it by filing for personal bankruptcy. In fact, in the United States, this binge-and-purge syndrome is looking more like a way of life for adults. Personal bankruptcies rose to a record high of 1.6 million households in 2003.

Household debt service payments as a percentage of disposable personal income have been on the rise for more than 10 years, plateauing now just above 13  percent, according to the St. Louis Federal Reserve Bank.

It reminds me of a memorable scene from the 1983 Monty Python movie, "The Meaning of Life," in which the grotesquely fat Mr. Creosote sits down at a restaurant along with a bucket, so that he can vomit and continue to gorge himself. When he's finally had enough, the maître d' brings him one last item, a mint wafer. After saying he's really too full, Mr. Creosote finally lets himself be talked into eating the wafer – and then he explodes.

It's the same problem with credit: It's hard to turn down, and it's just as hard to know when you've had enough – until it's too late. And although consumers can binge and then purge into the bankruptcy bucket, the U.S. economy doesn't have that "luxury." It's the one that will explode in the end.

The Federal Reserve has been complicit in advancing this condition. Between pumping up the money supply prior to 2000 amid worries about Y2K, and setting uncommonly low interest rates since 2001, the Fed has extended easy terms to financial institutions, which, in turn, have extended more credit to businesses and consumers.

Up until now, easy credit has helped consumers to support the economy, because more credit buys more things. But our confidence has just declined to a seven-month low, as measured by the Consumer Confidence Index, which dropped 3.9 points to 92.8 for October, down from 96.7 in September. That doesn't bode well for consumer spending in the short term.

The main problem: The economy has been growing largely on credit. The real consequence of too much credit for too long is a period of deflation. Hardly anyone wants to contemplate that idea. But, then, hardly anyone contemplates getting in over their heads with debt until they have to declare personal bankruptcy.

Whispers of a recession are growing louder, with The Conference Board reporting ion Oct. 21 that its composite index of leading indicators fell again in September for the fourth straight month by 0.1 percent. Normally, economists begin to think about the possibility of a recession when the leading indicators show three straight declines. The argument against it right now is that the last two months' declines of 0.1 percent and 0.3 percent are too "slight."

But that 0.1 percent sounds like a mint wafer to me, which means the economy may be closer to exploding than we know. That's exactly the time when consumers are supposed to help, thanks to our purchasing power. But we can't help get the economy back on track this time, because we've already overstretched our borrowing ability.

Pardon me, would you mind moving that bucket over here? I think I'm going to be sick.

Susan C. Walker writes for Elliott Wave International, a financial analysis company. She has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter for the Federal Reserve Bank of Atlanta. She received her B.A. in Classics from Stanford University.