The Miami Herald

The federal budget deficit is expected to grow by $464 billion a year. So what? That's measly.

To me, the debt figure that deserves attention is one that was released in January, when consumer debt passed $2 trillion for the first time. On Monday, when the Fed releases the latest monthly statistic, the tab is expected to go up by $5 billion.

''I think the consumer is broke,'' James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis, said in a telephone interview. ``But I don't think that will be recognized until interest rates go up.''

That's widely expected to begin this month, when the Fed is expected to raise short-term interest rates by a quarter point. A quarter point won't kill consumers, Paulsen says, but if rate increases continue, consumers will find their balance sheets in precarious condition.

Let's start by looking at credit-card debt and rates. About half of all cards carry variable rates, so they'll go up when market interest rates rise.

As for the other half, the fixed-rate cards, ''they are only fixed until [the card issuer] decides to change it,'' said Greg McBride, a Bankrate.com analyst.

So they send you a notice, and, legally, 15 days later, you're paying more. But when rates go up, can consumers afford it? It is a question economists say they can't really answer.

The average outstanding credit-card balance is $3,815, a recent Gallup poll found. Quite a load. If you take into consideration the typical full-time wage in the Greater Miami-Fort Lauderdale area, according to the Bureau of Labor Statistics, of $17.81 an hour, it would take 6 ½ weeks of work to pay off the average outstanding balance. And that would only happen if you were to send every after-tax penny off to the credit-card company.

Now let's fill in the rest of the debt picture. The typical household -- paying a mortgage, credit cards, car leases, insurance and property tax -- commits 18.41 percent of its income to such debts, according to a Federal Reserve Board estimate. This so-called Financial Obligations Ratio means that almost one buck out of every five goes to repay debt.

The percentage has been creeping up for 20 years; it was 15.5 percent at the start of 1984. And a suddenly much larger portion is in home-equity loans. In the past year, they grew by 36 percent, in a seeming rush by consumers to grab some cash when rates were low.

Home-equity loans are the fastest-growing asset class -- a bank's assets are its loans -- at commercial banks, notes Edward Yardeni, chief investment strategist at Prudential Equity Group. Consumers took out $86 billion in home-equity loans in the past 12 months.

''It's worth at least alerting people that they may be being seduced by these loans. They are tricky,'' Yardeni said in a telephone interview. ``They sure look cheap now, but rates could go up, and you could get yourself into a predicament.''

In fact, rates on home-equity loans can be adjusted monthly. And should you somehow not make the payments, often the lender will take what's needed out of the line of credit, which increases what you owe.

So what's brought us to this point? We've been through a recession, during which inflation was low and prices for some important products declined. Those who held on to their jobs found that they had a real increase in buying power for such things as autos and electronics.

There was a surge of mortgage refinancings, meanwhile, as interest rates dropped. Cash flowed out of homes and into consumer spending -- on cars, houses, renovations, who knows.

What would bring about a consumer collapse, in Paulsen's view, would be a recovering economy, in which inflation would push prices up and purchasing power would decline just as interest rates rose. That would put an end to refinancings, which fueled the consumer spending boom in the first place.

What bothers me is what didn't happen in these years of low inflation and low rates.

''Consumers had the opportunity to clean up their balance sheets,'' Paulsen said. ``Had they made that effort, they'd be in a very strong position now. But they didn't. They took the refinancing cash and went out and spent it.''

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