The End of Easy Living

Source: San Francisco Chronicle

It's a global shift that some are calling the Great Reckoning.

For a generation, economists warned that Americans were living too large. With wallets crammed with credit cards and home-equity loans available to any homeowner who could sign his or her name, consumers went on a debt-fueled buying binge. Living rooms bulged with the latest in snazzy electronics and garages filled with shiny new cars and trucks. Restaurants were fully booked, and airlines whisked happy passengers to dream vacations around the world.

Now, that shop-till-you-drop, I-want-it-all-and-I-want-it-now era may be coming to an end. It couldn't last because it was built on a mountain of money borrowed from overseas.

Year after year, the United States bought more from the rest of the world than it sold as foreign nations cranked out shipload after shipload of goods destined for American consumers. By 2006, the U.S. international deficit in trade and related payments exceeded $800 billion, about 7 percent of the entire economy.

It was only thanks to the kindness of strangers that such a drain of dollars was able to continue. Every year, overseas investors poured hundreds of billions of dollars into U.S. stocks, bonds, real estate and other assets, largely offsetting our taste for imported goods.

But the housing crash, a severe credit crunch and a dizzying fall of the dollar are depriving the nation of the means to keep on borrowing and spending. Foreigners have become wary of underwriting the U.S. standard of living. The flow of outside investment is slowing.

In effect, the United States has maxed out on its national credit card. Like it or not, that's one of the most important things now forcing a new standard of frugality on free-spending Americans.

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The only reason the United States could afford to buy all that foreign stuff was that overseas investors put hundreds of billions of dollars into the U.S. economy by buying our stocks, bonds and real estate. Now, spooked by the housing crisis, foreigners have cut by about half the money they invest in the United States. That's had a dramatic effect on consumers. First, it's pushed the dollar down. The lower dollar is one of the key reasons prices of food, gas and other products have shot up. For example, oil exporting countries are getting paid with less-valuable dollars, so they raise the price of crude to offset the greenback's fall. U.S. motorists in turn get walloped at the gas pump. The same holds for a wide range of other imported products. Second, the reluctance of foreigners to invest in the United States is one of the reasons credit is scarce and loans are harder to get in this country. If U.S. banks can't sell mortgages to investors in Europe and Asia, they are less willing to lend, intensifying the credit crunch.