And now, the great American car crash

As America's debt crisis spreads ever deeper into the economy, all those cars, washing machines and holidays bought for years on the never-never are becoming a colossal problem right now.

Credit markets have now tightened in almost every field as a consequence of the collapse of the market in sub-prime mortgages. Want to borrow money to buy a car? Think again. Raise that cash advance limit on your credit card? Good luck.

Since 1981, there has been only one financial quarter in which Americans spent less than they did the previous year. That was during the 1991 recession. Now economists are predicting that the first half of 2008 will see two consecutive quarters in which Americans spend less than they did in the same periods of 2007.

Earlier this month, Fitch, the credit ratings agency, said late payments on car loans are at their highest level for 10 years. GMAC, one of the leading car loan companies, has announced it will be closing most of its north American offices due to rising losses.

For years now, Americans have grown used to buying on credit and then paying off their debts by refinancing the mortgages on their homes. This worked as long as house prices rose. But the music stopped last year. House prices are falling and many home owners are finding themselves with negative equity and unable to pay off those credit card bills.

Every day, the newspapers are filled with sob stories of supposedly low-risk borrowers, people with good, stable jobs who borrowed against their houses to pay for vacations or university tuition for their children and now find themselves mired in debt. Their adjustable mortgage rates keep re-setting upwards and the value of their homes goes down. It is a hideous spiral.

The personal savings rate in America - the share of income left after consumption - has been falling for years. In 2001, it was 12 per cent. Today, it is close to zero. Americans have lost the habit of saving for a rainy day. Instead, they've become dependent on lenders. Now, lenders are refusing to lend.

Credit card companies, which once fought their way through the letter box with offers, are now jacking up interest rates and cutting borrowing limits. The effect of this was seen at Christmas. Instead of increasing their borrowing, as normal, consumers borrowed less than they did in November.

The doom-mongers have been bolstered by Kenneth Rogoff, an economics professor at Harvard and former chief economist at the International Monetary Fund. In a recent paper, he compared the current crisis to five of the biggest financial crises of the 20th century, including Japan's 'lost decade' which began in 1992.

He said that the sub-prime losses will inevitably lead to problems in commercial property, credit cards, car loans and corporate debt and may amount to $1tr of losses before all is done. "We haven't by any means seen everything," Rogoff said. "If it were just the sub-prime debt, it wouldn't be so bad. We're just entering the recession, so the defaults are just beginning."

As Rogoff and many others are arguing, the problem America faces is not sub-prime mortgages. It is a more general credit bubble which inflated over nearly three decades and finally is popping. Ordinary people changed the habits of centuries, notably saving first and buying later, to buy now and pay later, thereby inflating asset prices and burdening themselves with debt.

In recent years, America's foreign trading partners, such as China and Japan, kept the party going by lending billions of dollars a month to the United States so its consumers could keep buying their goods. But now, borrowing on any scale has ground to a halt.

America's last two recessions, in the early 1990s and following the collapse of the dot-com bubble in 2001, were brief by historical standards, technically just eight months each, though wretched for those who suffered. The recession America is descending into now is likely to last much longer. ·