The crash unfolding on Wall Street is not just the fall of once-mighty banks and corporations that took on too much debt, but the collapse of an American economy and lifestyle that for decades has been purchased with credit cards.
The nation's creditors - many of them foreign countries such as China and Brazil with ample economic needs of their own - reached a point this summer at which they were no longer willing to extend new loans in light of burgeoning default rates.
One of every 10 American homeowners has stopped making mortgage payments, and high-flying investment banks such as Lehman Brothers and Bear Stearns that peddled American debt around the world found themselves in bankruptcy and default.
The boycott by foreign lenders is forcing U.S. businesses and consumers to live more within their means, while political leaders frantically try to find ways to keep the financial sector alive without the free flow of an estimated $3 billion a day from abroad, analysts say. The spigot of foreign money in the heyday of the credit boom earlier this decade enabled everyone from Wall Street's best and brightest to college students with no income to easily obtain cheap loans.
"The party is over," said Peter Schiff, president of Euro Pacific Capital. "The current financial storm represents the death throes of the old global economic order, and perhaps the birth pains of a new one. The sun is setting on the borrow-and-spend culture that has all but defined us for a generation. ... The sooner we come to grips with this, the better."
The nation's increasing reliance on debt to grow and prosper is manifested in the current account deficits that have increased dramatically this decade. Those deficits show how much the U.S. collectively spends more than it produces and how much money is owed to the rest of the world. The federal deficit hit an unprecedented $812 billion in 2006, at the peak of the housing bubble, before declining to $738 billion last year as the housing market crumbled.
The huge external debt was financed for years with a flow of credit from abroad, but that suddenly shut down in July, when foreigners pulled $25.6 billion out of U.S. stock and bond markets, according to the Treasury's most recent figures on international capital flows. About the same time, Fannie Mae and Freddie Mac, former favorites of Asian investors in particular, started having trouble raising funds. The government later took over the mortgage giants as they became insolvent.
"We can no longer entice foreigners into lending us their available savings," said Mr. Schiff. "Given that we are already too loaded up on existing debt that we cannot realistically repay, who can blame them for not wanting to lend us more?"
With the abrupt shutdown of the credit spigot this summer, the housing and credit markets faced an outright crisis and easy loans all but disappeared. Consumer spending reached its biggest decline in years as banks - having difficulty raising funds - severely limited access to mortgages, home-equity loans and other kinds of credit.
"The day of reckoning appears to have arrived," said Stephen Stanley, chief economist at RBS Greenwich Capital, noting that scarcer credit is forcing Americans to save more of their income and spend less. One result is that the trade deficit is now dropping at a 25 percent annual rate, he said. "As Americans retrench, the structural imbalances that the world bludgeoned us about will shrink in size all too quickly."
Political and financial leaders always knew that the inevitable end of the great debt binge would be painful, forcing Americans to dramatically cut back spending and bringing on a long, deep recession that Mr. Stanley and other economists are predicting.
"We have warned for years to be careful what you wish for on this count," he said.
Laura Nishikawa, an analyst with Innovest, a credit-research group that is predicting a major rise in credit-card defaults, said consumers took on increased debt in recent years to finance middle-income and affluent lifestyles even as their wages were stagnating and savings were dwindling.
"The mortgage problem is, in fact, a symptom of a deeper crisis of deteriorated consumer financial health," she said.
Now, big banks like Bank of America, Citibank, JPMorgan Chase, Capital One and American Express - themselves hard-pressed to get loans in bank-funding markets - are reducing consumers' credit-card limits and home-equity lines and limiting credit-card-balance transfers, putting already pinched consumers into serious binds, she said.
"When they reduce credit availability, consumers won't have the ability to roll their debt over, and the issuers will essentially force customers into default," she said.
Consumers sank deeper into debt during the housing boom, when easy initial mortgage terms allowed them to buy bigger, more expensive homes and rapid appreciation opened the door to cash-out refinancings and home-equity loans that financed other spending.
"Millions of households have been operating just like hedge funds for a long time," said Brent Wilson, analyst with Reochronicle.com, a Web site tracking foreclosed homes, describing how ever-increasing debt financed the doubling or tripling of house prices in many areas that have now deflated.
"They borrowed ever-increasing amounts of money to finance an asset whose price depends on borrowing ever-increasing amounts of money. The financial profile of hedge funds and millions of households is almost identical," he said. Now, "the financial sector is on its knees, since they financed the speculation."
But the problem was not confined to real estate, he said. "The fact is that the whole economy to some extent has been operating like a hedge fund for a long time - households, corporations, state governments, Wall Street, cities" - all leveraging assets like real estate to finance a spending binge, he said.
"It looks like a long period of consolidation has set in," he said. "Many weaker companies will go bankrupt, many more banks will go under - with or without help from the federal government, stocks will probably be weak for some time."
Many analysts find it disconcerting and ironic that the solutions offered by the Treasury, Federal Reserve and Congress rely on massive issues of debt from the Treasury to try to save cash-strapped banks, homeowners and corporations.
The Treasury is about the only American entity that still has easy access to cheap loans as investors seeking safe havens pile money into Treasury bills paying close to 0 percent interest. The Treasury, already the world's biggest debtor, has been adding to its red ink at a prodigious rate to finance rescue programs that could drive the U.S. budget deficit to an unprecedented $1 trillion next year.
"The intention of all these daily federal interventions is to keep the credit spigots open, so Americans can go even deeper into debt to buy more stuff they can't actually afford," Mr. Schiff said.
"The sad reality is that we borrowed and spent our way into this crisis, and we are not going to borrow and spend our way out of it," he said. "Savings can't be magically concocted into existence by a printing press, but can only be created by consumers who spend less than they earn."