Consumer debt a cloud over U.S.

With oil prices hovering above $40 a barrel, experts have calmed frayed nerves by noting that today's services-driven American economy is much less addicted to the black stuff than yesterday's industrial economy. From 1973 to 2003, after all, the amount of oil and gas needed to create a dollar of gross domestic product fell by half. Structural changes in the economy have let the nation absorb the recent shock of rising crude.

That's the good news. The bad news is that other recent structural changes in the economy — the federal government's shift from surpluses to huge deficits, the national predilection for consumption over saving and housing prices that climb faster than incomes — have increased the country's reliance on another kind of fuel: credit.

As a result, the American economic ship, which has weathered the recent run-up in crude oil prices, may be more vulnerable to sudden surges in the price of money. If the rate on 30-year fixed mortgages were to rise from 5.4 percent today to 7.5 percent next February, homeowners could get walloped.

"Rather go to bed supperless than rise in debt," Benjamin Franklin wrote in Poor Richard's Almanac. Well, in recent years, American consumers, businesses and governments have been hitting the sack with their stomachs bloated and their charge cards maxed out. From 1988 to 2000, the ratio of nonfinancial debt to gross domestic product held steady at about 1.8 to 1. But recently, consumer, business and government credit has bulged like the belly of a contestant at a hot-dog eating contest at Coney Island.

From the beginning of 2001 to the end of 2003, the economy added $1.317 trillion in gross domestic product and $4.2 trillion in debt.

That means that each new dollar of economic output was accompanied by $3.19 in new debt. So now, for the first time, the debt-to-GDP ratio stands at more than two to one.

Throw in financial credit — the debt that investment banks and others use to finance trading activities and the like — and total debt has more than doubled since 1994. The mere existence of huge debt needn't be a source of panic. You and I may view debt as an economic input — we borrow so we can spend and invest, and hence, as politicians like to say, "grow the economy." Academic economists view it more as a by-product. Debt is created when people, governments and companies spend money, trade and produce.