Debt Bubble Stretches to Breaking Point

Right now, securities backed by credit cards are very hot products because the underlying rates on the cards float -- nirvana for investors bailing out of fixed-rate bonds by the prospect of higher rates.

Wall Street has sold $185 billion in asset-backed securities so far this year, about 22% more than at this time in 2003, Merrill Lynch calculates. That has created demand for the underlying credit card loans needed to create these securities. That, in turn, has made it easy for credit card issuers to sell their credit card loans to Wall Street for repackaging. In other words, credit card companies can sell just about as much credit card debt as they can create.

So while direct-mail marketing of cards is down, largely because it has been less effective lately, the level of total marketing is up. No debt-pressed consumer need worry that he can't get more credit from somebody in this market. Again, this stretches out the day of reckoning, because a consumer with large card balances can switch those balances to another card, probably at a lower rate, at least for a while. But it does make the eventual reckoning more painful.

3. It's tough to admit the cycle is over. The impulse is to keep inflating the bubble. That's why they finally pop. Consumers stretched by mortgages, home equity loans and credit card debt don't want to admit that the low-interest-rate cycle is over. They'd rather borrow more, especially because it's easier than ever right now, than cut current spending to pay off that debt. But consumers aren't alone. Some consumer product companies are probably even more hooked on issuing credit than consumers are on using it.

General Motors (GM Quote) used to be a car company. In 2003, the company's finance division, General Motors Acceptance Corp. (or GMAC), reported profits of $2.8 billion. General Motors' car business showed profits of just $1.1 billion. The finance division accounted for 71% of the "car" company's profits. Profits at GMAC grew by 65% from 2001 to 2003.