08/22/2011 05:44 pm ET | Updated Oct 22, 2011

What's Great for the American Consumer Is Bad for Our Nation's Economy

Three cheers for the American consumer.

While our leaders in Washington pay little more than lip service to the need to reduce our nation's debt addiction, Americans by the millions are working harder than anytime in the past 40 years to live within their means.

Far fewer consumers are carrying credit card balances these days and, better yet, those who still owe money on their cards owe less than they used to.

According to TransUnion, the average consumer credit card balance as of March 31st was just under $4,700, a ten-year low. That's down 19% from 2009 levels.

Overall, the sum of U.S. consumer debt -- including home mortgages and home equity credit lines -- fell almost 16% since the onset of the recent recession.

This so-called "deleveraging," most economists say, is either a reflexive response to the collapse of Wall Street and housing prices, or it's a sea change in the spending habits of the American people.

"Our analysis shows that consumers have made a concerted effort to pay down their credit cards during these uncertain economic times," Ezra Becker, a TransUnion executive, recently told the ABA Banking Journal.

This new discipline among consumers is forcing politicians, policymakers, economists, bankers, financial services executives and most Fortune 500 CEOs to sit up and take notice.


Put simply, when consumers borrow less they also spend less. And when they spend less, they consume less.

Given that roughly 70% of the U.S. gross domestic product (GDP) relies on household consumption, when consumers reign in their borrowing, it spells near-term trouble for our economy, job creation, corporate profits and tax revenues.

Think of the irony...

American consumers -- after years of excessive borrowing -- finally buckle down, reduce their personal debt and improve their household balance sheets. Yet such responsible behavior turns out to be a serious drag on our nation's economic engine.

"Deleveraging is easier to say than do," writes Alen Mattich, a senior reporter for Dow Jones Newswires. Much of what fueled economic growth in America and other developed countries over the past 20 years was consumer borrowing, he explains.

So now, Mattich points out, not only have individuals ceased to lop on more and more debt, their priorities have shifted to paying off what they borrowed for yesterday's consumption.

Such behavior constitutes a praiseworthy fiscal fitness diet for consumers - but also places a serious damper on our economic growth.

Take one example. In his 2010 book, The Age of Deleveraging, economist and Wall Street pundit A. Gary Shilling says many American companies -- and hence their shareholders and employees -- stand to pay the price of consumers' newfound monetary pragmatism.

"Leisure airline trips, ocean cruises, new household appliances and vehicles are expenditures consumers will postpone or avoid as the ongoing saving spree persists for years," Shilling cautions.

Dow Jones's Mattich echoes Shilling's foreboding. "It seems clear we're only at the beginning of a very long, rocky road. Which investors will, like penitents, walk on their knees."

I genuinely wish there were an alternative for our country. But rebounding from any addiction and the excesses it fosters is never easy.

Our economy may, indeed, be in for a painful period of deleveraging-driven restraint.

But let there be no doubt that consumers have finally got it right

It's high time we pay down -- and ideally pay off -- our irresponsible debt, fortify our savings and re-inflate our retirement portfolios.

Then, as proud owners of a pristine household balance sheet, we can once again purchase appliances, buy new cars and take luxury vacations. Only next time, we won't be paying for these discretionary goods and services with someone else's borrowed funds.

Growth that is paid in full -- rather than recklessly borrowed -- will in time make our American economy infinitely stronger and far more durable.

Next: In the second of three columns on the topic of consumer debt, I'll discuss ways that credit card providers and retailers can lure back wary consumers and provide a fresh spark to America's stagnant economy. And I'll show you how you can become your own source of financing using a method that's actually better than debt free.

Update: Eliminating personal deficit spending is the first stage in my 5-step program that empowers each and every one of us to become effective citizen soldiers in the battle to fix our nation's economic woes and political gridlock.

To learn more, I recommend you read my August 2011 Bank On Yourself website Cover Story, "A Do-It-Yourself Fix For The Economy, Deficit, Social Security and Unemployment. "

New York Times bestselling author Pamela Yellen is the founder of, a website dedicated to helping people achieve lifetime financial security and self-reliance. As president of, she's helped hundreds of thousands grow their wealth safely and predictably.