Living in a World with Less Credit

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Now consumers everywhere are reeling. Christopher Adams is an architect who lives with his wife Rachel in a North Miami Beach condo project in which fully 25% of the 244 units are in foreclosure. That means higher maintenance fees for those — like the Adamses — who continue to pay their mortgages. And as his monthly payments have gone up, Adams' income has gone down. His firm has lost three projects over the past year as commercial developers canceled jobs. As a result, he and his wife make decisions that ripple through the economy. He cashed out of his 401(k) to pay bills. A plan to buy a new car? History. They took their son out of an expensive private school. Credit cards? They don't use them anymore. "Debit cards and cash only," says Rachel.

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For a U.S. company in retail — the country's second largest industry, employing some 25 million Americans — those are about the most depressing words you can hear. And millions of Americans are now on the same page. Consider Maria Calderon, a single mother of two in Greenacres, Fla., who works for the Palm Beach County public defender's office. Two months ago, she lost a second, part-time job that had helped pay the bills. She soon surrendered to the gods of credit-card debt. She visited a West Palm Beach credit-counseling service to deal with some $20,000 in unpaid bills. "I wasn't ashamed," says Calderon. "I had to tighten up. It was a decision I had to make to take care of my two kids."

The great risk, as consumers like Calderon cut their spending, is that bad economic news begets more bad news. Bernanke recently called this the "adverse-reaction loop": as consumers spend less, the economy weakens more, unemployment rises, mortgage foreclosures increase, putting more pressure on the financial system, and on the downward spiral goes. Capital Economics' Ashworth acknowledges that the "scenario is out there. It can't be totally dismissed. This deleveraging process could get very, very scary."

Washington's Answer: Charge!
This, you'll not be surprised to learn, is what the government is trying to avoid at all costs. "We're going to see an evaporation of concern about fiscal restraint simply because the threat of an economic collapse is so great," says Robert Reischauer, president of the Urban Institute, a public-policy think tank. In other words, as the real world sheds debt, the government takes on more and more in the hope that at some point the economy will stabilize and then begin growing again.

The good news is that most economists believe all the weaponry the government is throwing at the problem will eventually have an effect. Interest rates are low and probably headed lower. More fiscal stimulus is on the way. Many economists are currently forecasting a couple of quarters of outright economic contraction. But many see a resumption of slow growth by the second half of next year. The sky, in other words, is not necessarily falling.

It just looks that way right now. "This is the worst economy I've seen since I've been in business," says Tom Slater, owner of Slater's Home Furnishings in Modesto. He's been in business for 39 years. Slater's behavior reflects the malaise: he has cut his personal spending at restaurants and retailers. But he realizes he's part of the solution too. "You can't stop and say, I'm going to keep my fingers crossed that someone's going to do business with me," he says. "We just have to do better business."

Less-leveraged business, in fact. The irony is that in the deleveraged society the U.S. is in the process of becoming, it's the careful consumer who may ultimately bail out the economy. Ashworth believes the U.S. savings rate will rise to 5% of GDP over the next two to three years. "We're going to save more and spend less, because now we don't have a choice," he says. That increase in savings, he figures, will amount to some $1 trillion — about the projected size of next year's deficit.

That would eliminate the need for foreigners to fund our deficits. The hope is that as we sober up from our debt binge, we'll at least be able to do it ourselves. An era of thrift may be necessary now, but at some point, Americans are going to have to feel like spending again for the economy to grow. It's just hard to see, amid the current economic gloom, when that day will come.

— with reporting by Hector Florin/West Palm Beach, Kristin Kloberdanz/Modesto, Mark Kukis/Washington and Siobhan Morrissey/Miami

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