All signs point to a recession: Home prices dropping, the dollar falling, more mortgages foreclosed, more credit cards delinquent or in default, consumer confidence down, retail sales the worst in a dozen years. We may pull out of it, yet. Bernanke and company may make bigger cuts in interest rates. Congress may enact a payroll tax holiday on the first fifteen thousand of income, as I’ve urged.

But look beyond the business cycle and the consequences may be larger. For years now, America’s middle class has lived beyond its paycheck. Middle-class lifestyles have flourished even though median wages have barely budged.

The reason is we’ve been able to borrow so much so easily. With housing prices rising, home equity loans have financed renovations and home improvements. With credit cards raining down like manna from heaven, we’ve bought plasma TVs, new appliances, vacations. With dollars artificially high because foreigners have held them even as the nation sank deeper into debt, we could summon cheap goods and services from the rest of the world.

But now, the era of easy money is over. The housing bubble is bursting, and home equity is drying up. Credit card debt is next. Personal bankruptcies rose 48 percent in first half of 2007, likely even more in the second half – which means a wave of credit-card defaults. If you think the trillion dollars in sub-prime mortgage debt carried by big banks is large, think of the record nine hundred fifteen billion dollars Americans hold in credit-card debt.

Meanwhile, as foreigners begin shifting out of dollars, we’ll no longer have access to cheap foreign goods and services. For starters, you can forget that long-awaited European vacation.

The splurge is over, folks. As the days of easy money come to an end, what will America look like? Maybe we’ll see a recession in the short term, but more importantly over the long term: the American middle class will have a truer understanding of what it can and cannot afford; a truer sense of what’s really happened to its paychecks; and a more realistic view of where and to whom the economic gains of the last dozen years have actually gone.


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