Your observations are correct in a normal economy. However the American economy has become abnormal in a number of ways.
The first of these is the money creation system of the Fed. Normally if someone wants to borrow, someone else must forgo spending. In a monetarist economy, the money to be borrowed is created out of thin air. It's money because they say it is. Thus spending is simply increased.
Ordinarily this would cause price inflation, but this is occurring in an unusual environment. The world economy in experiencing a deflationary environment. Many believe this is typical of economies experiencing increased productivity, while others ascribe other causes such as the end of the Cold War with reduced military spending. Regardless of the cause the deflationary environment is acknowledged by most.
So the secret is, absent the large money creation the typical Consumer Price Index might show a 4% annual decline. With the inflation of the money supply, the CPI shows an inflation rate of 2%, because the assumption is the base is 0% rather than -4%. This might seem serendipitous, at least from the Fed's standpoint as they're true purpose is to protect the banks. If the value of assets decline by say 50% over a period of time, well protected loans become loans with insufficient collateral. So as I said it seems propitious.
However, my Granddad's cousin, Charles Rist, who was the Governor of the Bank of France during the 1930s made this comment in a book published in 1955. "A policy aimed at monetary stability will secure a relative stability of prices, but the economic history of the 1920s teaches us that a policy whose goal is stabilization of prices may result in inflation of money and credit, and very unsound speculation."
His book was recently translated again into English for those interested. "History of Monetary and Credit Theory from John Law to the Present Day"
amazon.fr
As Rist suggested, monetary inflation during a period of deflation has stabilized prices at the cost of creating a series of one financial bubbles after another: the stock market; the bond market, the real estate market, etc.
Because this is a coordinated policy, the bubbles have been created world-wide, with even Australia and New Zealand with responsible monetary policies being caught up in the prop-wash of sea of newly create money. I myself have sent much of my life savings to Australia in the pursuit of an adequate return.
There are specific cultural factors which make debt unlike the situation your describe. In American society excessive debt levels almost always ends in a bankruptcy filing rather than any economy or additional hard work. In America there is virtually no stigma to bankruptcy and credit can be re-established within months, even though it remains on the credit report for ten years.
Americans are often shocked to learn that company directors of British firms can be personally liable for the insolvency of their corporation. Instead American firms are in the habit of paying their officers five or ten years worth of salary prior to filing for bankruptcy, or perhaps during the reorganization to the disadvantage of employees, creditors and shareholders.
Regardless of the details, debt in America has become a lifestyle which precludes saving and leads people into decisions they would not otherwise find rational. It's why I find it so enjoyable to spend some months each year in Australia - which, though it has changed greatly, is decades behind in the levels of debt so common in England and America.
America has a wealthy appearance in comparison to Australia, but this is deceptive. Australians have money invested for retirement which Americans certainly do not. The average Net Worth of the 50 year old American is less than $40,000 including home equity. This average rises significantly over the next 15 of life because the wealthy inherit their parent estates. But for those who do not inherit their Net Worth changes little.
The history of this change in Consumer Credit in America goes back to the 1950s. President Eisenhower was concerned about the post-war economy sliding back into the depression of the 1930s. He called the heads of large consumer goods companies and urged them to extend consumer credit for their goods. This soon led to the first credit cards. Earlier the 5 year home mortgage had become the 15 year mortgage under FDR's New Deal. Under the credit expansion after Eisenhower this became the 22 year mortgage, then a 25 year, now 30 and 40 year, interest only - even with negative amortization.
It's wonderful to use debt to pull demand from the future into the present - but it reaches a point of diminishing returns. At this point, demand cannot be expanded with additional new debt. Many believe this is the ultimate cause of an economic depression - a sudden de-leveraging. Those who pay the price for this are not those in debt, but those who saved.
home.pacbell.net
This chart shows the real problem in a picture. Monetarism is like magic as leverage gets applied, but once maximum leverage is achieved, the wheels fall off the cart.
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