U.S. Consumer Credit Card Debt May Crash Economy

Christmas has come and gone and the biggest buying spree of the year is over. Now comes the tough part: cutting up those credit cards to keep from charging anymore in the new year.

American consumers could keep Edward Scissorhands (search) busy for months just slicing up our maxed-out credit cards. Remember him? In the 1990 Tim Burton movie about the young man with scissors for hands, Johnny Depp mainly used his talented appendages to trim hair and create whimsical creatures out of shrubbery.

But what's in order now is much more straightforward snipping. Sure, everyone spends a little more than they mean to at this time of year; the problem is that we've all been spending a little more than we mean to throughout the last few years. Let's take a look at our credit habits as a nation to get an idea of why we may be in over our heads.

About a month ago, the New York Times examined how the use of credit has taken off dramatically in the United States since 1990. While the number of people holding charge cards grew about 75 percent— from 82 million in 1990 to 144 million in 2003— the amount they charged during that period grew by a much larger percentage: approximately 350 percent, from $338 billion to $1.5 trillion.

Since the number of chargers is growing at a slower rate than the amounts being charged, you can guess what that means. Yes, the monthly revolving balances have been growing by leaps and bounds. In 1990, the Times reports, the average was about $2,550 for those households that carried a balance. At the end of 2003, that balance averaged about $7,520 – an increase of nearly 200 percent!

And that's only credit cards. The average U.S. household owes mortgage debt, student loans and automobile loans, in addition to credit card debt.

Why are we doing this to ourselves? Personal income certainly hasn't risen 350 percent over the past 13 years. Let's see, that would mean that a person who depended on salary as the only source of income would have had to see a $35,000 salary in 1990 grow to $122,500 in 2003 to keep up with the extra credit load. Possible, but not too likely.

In fact, on the national level, the Bureau of Labor Statistics shows that aggregate U.S. personal income in 1990 was $4.9 trillion. In 2003, it was $9.2 trillion. The rate of growth? 188 percent — pretty far off from the 350 percent growth in credit card charges.

This give-me-credit-or-give-me-death behavior reminds me of that America Online commercial where hapless souls say things like: "I'd really like all my files to be obliterated by a virus." By analogy, you might think that consumers were saying, "I'd really like to owe a whole bunch more than I can afford, so that I can declare bankruptcy."

There's a reason you don't hear anyone saying those words: It's because credit has been so easy to get that we've managed to inflate people's ideas of how much they can take on. Barron's recently published a striking chart, showing Household Surplus (more income than outgo) compared with Household Deficit.

Throughout the 1960s, '70s, '80s, and '90s, households showed a surplus of varying degrees. It wasn't until 1999 — for the first time in about 50 years — that U.S. households started spending more than they took in. What started as a small deficit of about $50 billion among households quickly spiked to a deficit of more than $350 billion in the second quarter of this year.

There's an axiom known by every economist under the sun: because consumers make up two-thirds of the economy, they must keep spending to keep the economy healthy. It's easy to see that we've been acting on cue for the economy, to the point that we've kept spending well beyond our means.

And perhaps we've been doing it because as a nation, we're basically optimistic – optimistic that we will always make more money to cover our debts, optimistic that the value of the houses we live in will continue to go up, optimistic that the economy will improve and create many new jobs.

In fact, that same optimism is implicit in the credit inflation bestowed on us by the Federal Reserve (search). To keep the economy pumped up, Greenspan & Co. have had to keep the consumer pumped up. And easy credit is the easiest path to take.

The only problem with this strategy is that at some point, consumers do reach a limit when they recognize that they're overstretched. It may be the day they notice that they've maxed out all their cards. Or the day they apply for another card and are turned down. Or the day the credit card company doubles their interest rate if they miss one payment.

But the day will also come when consumers will wish they'd played the role of Edward Scissorhands themselves. As consumer optimism slips away, it will affect the credit card companies, all of whom have been making a killing in their pretax profits, as well as on the fee revenues they collect from consumers. Pretax profits for the credit card companies as reported by the Times have grown 360 percent from 1990 to 2003, while fee revenues have grown 250 percent. Do you think they want to close that spigot voluntarily?

The larger picture is even grimmer – something we haven't faced as a nation in a long time. As fewer people have the ability to buy stuff, prices must come down. And when prices come down across the board, what the Fed will be facing is not that old enemy, inflation, but a new-old enemy, deflation.

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.