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The Fake-It-Till-You-Make-It Consumer

One of my favorite TV commercials of all time comes from LendingTree Financial. A seemingly well-off consumer shows us his array of upper-middle-class perks, including a new car, a fancy house, and a country-club membership.

After giving a tour of his coveted lifestyle, the man -- grinning ear to ear -- happily states, "How do I do it? I'm in debt up to my eyeballs! I can barely pay my finance charges! Somebody help me."

Welcome to the real world. As entertaining as the commercial is, it all too well depicts the true nature of the U.S. consumer. In a world where keeping up with the Joneses seemingly becomes a basic survival need, even the prospects of a looming recession won't push some consumers to cut back on their cushy lifestyles.

Show me the money
For the past decade or so, living the posh life wasn't too difficult for many Americans. With soaring home values and no shortage of mortgage bankers peddling endless amounts of refinancing products, easy access to large amounts of cash became a reality for anyone with a pulse and a dream. Trillions of dollars got injected into consumers' pockets this way over the past several years.

These days, you don't have to look too far to see the curtain coming down on the era of using home values as a personal ATM. Last week's sale of Countrywide (NYSE: CFC  ) to Bank of America (NYSE: BAC  ) highlights just how ugly the residential lending industry has gotten. The once-gushing spigot of home-value cash that consumers used for that new plasma TV from Best Buy (NYSE: BBY  ) and their bling from Tiffany (NYSE: TIF  ) is slowing to a trickle. So it would make sense that consumers will be forced to curtail their spending habits and live within their means.

Right?

Please. Let me introduce you to the American consumer, my friends.

The ladder of financial prosperity runs one way. It's a blast to climb up, but it's just as unthinkable to climb down. When you achieve a certain lifestyle -- whether it involves an enormous house, a third car, bottled water for your pooch, or the always popular desire for seven TVs in a car one-fiftieth the size of your living room -- scaling back from what you're accustomed to rarely gets a thought.

Adding an insulting touch, people typically become so quickly accustomed to a way of life that they start seeing perks as necessities. What we always dreamed of becomes nothing more than normal life once we achieve it. Psychologists call this phenomenon "hedonic adaptations."

I see it, I like it, I buy it
For the average consumer, this mind-set amounts to an ever-increasing desire to spend, spend, spend, regardless of our ability to afford anything we're buying. With home-equity lines of credit becoming increasingly further out of reach, consumers are turning en masse to an easier, albeit far scarier, form of funding their spending habits: credit cards. We're a debtor nation, with the average American household being the proud owner of nearly $10,000 in credit card debt -- a figure that equates to more than 20% of average income. Good grief.

The figures on consumer credit card usage will make your brain hurt -- 11% annualized growth on outstanding balances for November, and total credit card debt quickly approaching $1 trillion. To be sure, the increase has been a boon for many years to credit card issuers such as American Express (NYSE: AXP  ) and Capital One (NYSE: COF  ) , but a weakening economy has begun to already bring higher default rates. Capital One, for example, wrote off 5.74% of all uncollectible payments last month, up from 5.34% in November.

Incognito economy?
Sure, this is all frightening, but what the heck does it mean for the economy going forward? Anytime consumer spending -- which makes up 70% of gross domestic product -- is jeopardized, the odds of a recession get pushed precipitously closer to reality. Credit in this nation has become not much less than an accepted Ponzi scheme; it's only a matter of time before the carousel comes to a halt and the full extent of how over our heads we've become reveals itself. Heavily viewed statistics such as holiday retail sales and same-store-sales growth don't mean anything if the numbers are being driven by consumers who rely on money they have no business spending in the first place.

When push comes to shove, the debt-loving habits of the American consumer can mask the true pulse of the economy -- everything from real wages to corporate profits and inflation. You can take economic data at face value, but when those numbers are being constructed by an economy running with a time bomb in its hand, a deeper look is in order.

Debt has its place in our economy, but our healthy use of it has given way to a dangerous binge. As the debt market continues to languish, the aftereffects of coming to terms with reality may indeed reveal a truth none of us would like to consider: Our coveted and prosperous economy has all along been fueled by wealth created out of thin air.

As our friend in the commercial so joyfully stated, "Somebody help me."

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Morgan Housel
TMFHousel

Economics and finance columnist for Fool.com. Analyst, Motley Fool One.

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