Americans teetering on $14 trillion debt pile

By Emily Kaiser - Analysis

WASHINGTON (Reuters) - Free-spending U.S. consumers who bought everything from homes to groceries on borrowed money are running out of credit, and paying the bills will cost the world's biggest economy and its trading partners dearly.

The housing bust has exposed just how much Americans were relying on rising home values to pad spending and replace traditional savings. During the five-year real estate boom that ended in late 2006, household wealth expanded, retail sales grew faster than income, and savings dwindled.

But as banks restrict access to mortgages, auto loans and credit cards, consumers are altering their spending behavior so rapidly that companies cannot adjust fast enough.

Banks that eagerly handed out credit cards during the good times are reducing credit limits and setting asides billions of dollars to cover losses as customers miss payments.

U.S. automakers are warning of a near collapse in demand because would-be buyers are unable or unwilling to get loans.

Stores are bracing for the worst holiday season sales performance in at least 18 years.

Meredith Whitney, the Oppenheimer & Co analyst who was among the first to warn that banks needed to raise huge amounts of money to offset mortgage losses, worries that cuts to credit limits will constrain already cautious consumers, reinforcing a vicious cycle of bank losses and economic decline.

"If you lose your job, if you get sick, if any unforeseen event happens, that's your slush fund," Whitney said at the Reuters Global Finance Summit in New York.

"If all of a sudden you lose your slush fund (or it) gets cut dramatically -- and it will -- everything about you changes, and you become more guarded as a consumer. You could be absolutely fine in every other area of your life, but getting your credit line cut changes your whole outlook."

Over the past decade, American households have piled on $8 trillion in debt, an increase of 137 percent, twice the gain seen in the size of the economy. At $14 trillion, the debt load is now roughly equal to the entire economy's annual output.

Much of the increase comes from home mortgages, which have expanded by $6 trillion since 1998, but it also reflects higher balances on credit cards and auto loans.

Despite the expanding debt burden, investors around the world poured money into securities backed by mortgages and credit card receivables for much of this decade, keeping borrowing costs low.

Thanks to the easy credit, U.S. consumers kept increasing their spending throughout the housing run-up, easily exceeding wage growth. Retailers opened hundreds of new stores to fill newly constructed shopping centers. Imports soared, swelling the reserves of exporters such as China. U.S. household savings dwindled to almost nothing.

All of that is changing as the world grows wary of offering more credit to overextended Americans. As defaults jump, banks are now having trouble finding buyers for any investments tied to U.S. household borrowing.

RESTORING FAITH