Charging ahead: America's biggest new export--credit cards--could bring down the world economy.

• Author: Kurlantzick, Joshua

FOR MOST OF THE LAST TWO GENERATIONS, the global economic system operated under a paradoxical division of labor. Americans consumed, while Asians--and much of the rest of the world--saved. The vast American consumer market helped drive the whole world economy. But since Americans were spending at such a prodigious clip, they weren't able to save much. That created two problems: There wasn't a lot of capital for business investment and even less to make up for the country's huge current account deficit--a function of our buying more from foreigners than we sell them. That's where the saving of the rest of the world came in. Foreigners saved so much that they had plenty of capital to invest--and where better to invest it than in the galloping, consumer-driven American economy?

Foreign investors, banks, and other companies purchased American equities, treasuries, and greenbacks, and invested in the United States (According to a recent Merrill Lynch report, the United States absorbed nearly three-quarters of the savings of the world's major industrial countries in 2002.) This inflow of foreign capital has kept America's current account deficit stable and U.S. inflation low, making it easier for American consumers to keep on buying. Asians, meanwhile, needed our consumption-driven economy because their export-driven economies thrived on Americans who spent every dollar they earned, and then some. This division of labor may have been morally dysfunctional. But as a global economic order, it worked like a charm.

Of course, economists long warned that the system was inherently unstable. If foreigners suddenly lost faith in the U.S. economy and pulled out their billions, the market would bid the value of the dollar down dramatically. Indeed, since the stock market bubble burst in 2000 that's already begun to happen. In the last two years, foreign investment in the U.S. economy has plummeted to levels last seen in the early 1990s. With America at war against terrorism, anxious economists now worry that rising anti-Americanism or just the war-induced strains on the American economy could prolong the foreign investment drought or dry it up even more, leading to a sharp devaluation of the dollar, and perhaps even a cycle of worldwide recession.

There's no way to predict if any of this will come to pass. But the crux of the problem is that these possibilities remain outside America's control. The only way to truly solve the problem is for Americans to save more at home or sell more goods and services overseas. Ironically, though, what may bring the whole system crashing down once and for all is one of America's own most rapidly growing exports: credit cards.

Sticky Rice, Stickier Debt

Until the mid-1990s, consumers outside North America and Western Europe rarely ran up large amounts of personal debt. With the credit card market in the developed world still growing, big credit card companies did not focus on the developing world (which includes most of Asia). Countries like Thailand still hadn't developed large populations of middle class consumers. But traditional mores also played a role. In Asia, where people historically considered saving an important virtue and conducted nearly all transactions in cash, personal debt was less a fact of life than a source of shame. As recently as the mid-1990s, South Koreans saved more than 30 percent of their GDP, while Americans struggled to save a measly 1 percent (though U.S. home values and ownership rates, a form of savings, did rise).

For a variety of reasons, however, the situation has recently begun to change. As some developing countries boomed during the 1990s, they germinated millions of new middle- and upper-class consumers who had more capital and more desire to purchase consumer goods and their own homes. Many of these new consumers were under 40--men and women less tied to traditional mores of saving. Many had traveled in North America and seen how Americans easily obtain loans, sign mortgages, and whip out credit cards. After the Asian financial crisis of 1997, which depleted much of the savings of this new middle class, credit was often the only way to keep buying.

At the same time, the late-1990s financial crises prompted Asian, Latin American, and Eastern European governments to try to stimulate domestic consumption to boost national growth rates. Two key ways to do that were to lower rates of interest and ease the regulation of credit. Over the last three years in Thailand, Prime Minister Thaksin Shinawatra has toured the country to...