The Economist says Americans are overreacting to the slowing economy. By historical measures, it says, there is little cause for such consumer gloominess, especially considering how comparatively well off Americans are. Americans have more wealth than any other people during any time in history.

But is it possible that all that wealth is merely an illusion?

The Economist is not alone in proclaiming American affluence. “The fact of the matter is that we in the United States … have just lived through—and continue to live in—the greatest period of prosperity in human history,” says Patrick Toomey, former House of Representatives member and president of the Club for Growth. “Over the last 25 years, more wealth has been created, more people have been lifted out of poverty, standards of living have been elevated more dramatically, and the quality and length of life have improved more than ever before in recorded history.”

The great wealth-creating American economy is “the greatest story never told,” he says. It is a “tremendous story” made possible by American economic freedom.

A superficial look at general living conditions seems to confirm that opinion. America is rich and increased with goods. The expanding economy “resulted directly in a better standard of living for virtually every segment of American society—including the poor. Among families living below the official poverty line in the early 1970s, less than 40 percent had a car, almost none had color televisions, and air conditioning was virtually unheard of,” says Toomey. But by 2004, an astounding “46 percent owned their own homes, almost 75 percent owned a car (indeed, 30 percent owned two or more cars), 97 percent had color tvs, and 67 percent had air conditioning. The poor in the U.S. have an average of 721 square feet of living space per person, as compared with 430 in Sweden and 92 in Mexico. Similarly … [t]here were 9.8 million cable tv subscribers in 1975, and 65 million in 2006; 2.1 million personal computers in 1985, and 243 million in 2007; 340 cell phone subscribers in 1985, and 243 million in 2007.”

Americans certainly “own” more things than ever before. But the question people need to be asking themselves is, where did all this supposed wealth come from? It didn’t just appear out of nowhere. Is it really the result of American economic freedom? Or some other financial innovation?

In reality, the greatest story never told is that the American economic miracle that began in the 1970s was really a sham.

Most people are no richer than they were, and contrary to rosy declarations by members of the media, politicians, former politicians, and others, the good times are about over. The prosperity myth is a cruel hoax.

Analysts like Toomey use the recent past as a guide to project a straight trend line into the future. History can be a powerful guiding tool if used correctly. But there is a danger too, especially if conclusions are drawn from faulty assumptions.

For example, an economist might look at the U.S. economy since the 1970s and note that, based on rising consumer spending patterns, we are the most prosperous nation in the world. From this, he might theorize that it is the tax cuts, growing service sector economy, more liberal banking system and depreciating dollar that is making Americans so prosperous. And he might conclude that if we keep doing what we’ve been doing, America will keep getting what it’s getting—increasing prosperity—for generations to come.

History very easily recounts effects—wars, riots, bull markets, airplane crashes, etc. But the underlying causes that produced those events are not always so easily discerned. What if America’s prosperity today had nothing to do with increasing productivity, superior Yankee ingenuity, or the other commonly mentioned factors? What if the underlying foundational cause of America’s current wealth was something completely disconnected from what economists commonly purport? And what if that foundation was false?

Then all their fancy predictions would be worth less than the paper they’re printed on.

Today, most of what economists measure as wealth is actually something also known by an altogether different name: debt.

Debt is what keeps America functioning, and growing levels of debt since the 1970s are what have been erroneously taken for the American economic miracle of the past 30-odd years. It’s not wealth. It’s debt.

It was in the 1970s when America started to become a nation of consumers. Good old-fashioned thrift and common sense went out the window, and “keeping up with the Joneses” became the fetish of ensuing decades. Americans went on the spending spree of the ages. Consequently, gdp grew. But it was mock-growth. The nation’s gross domestic product began to reflect consumer and government spending more than American industrial production. And even much of that spending was on imports. But most economists didn’t worry. By and large, they just looked at the numbers and reported that the economy was expanding, and that was all that mattered. “Keep doing what you are doing,” they said.

And most people didn’t argue. After all, consumers felt like kings as they loaded up the toys and bought second homes. It was all part of the American miracle. But unfortunately, it was all “ersatz” wealth as the Daily Reckoning says—just a “misleading sensation caused by inflation of their house prices, credit cards, cheap products at Wal-Mart, and home equity lines” (July 25).

Americans weren’t really any wealthier. They just looked and felt wealthier as they spent the wealth accumulated by previous generations, hawking their financial future and their children’s in the process.

And now, like an addict, America is desperately trying to maintain its standard of living, even though the next borrowing binge could push it over the edge.

The government leads the way. When the economy began to slow last year, what was the Federal Reserve Bank’s response? First, it drastically slashed interest rates. Why? To make it easier for people and businesses to borrow and spend more money.

When that didn’t work, what was the next solution? The federal government borrowed $168 billion in “stimulus” money to send checks to each and every American for the express purpose of more spending.

The new $300 billion housing bill is more of the same—the U.S. spending more money it doesn’t have to bail out homeowners and bankers who got in over their heads by borrowing too much.

But debt is the problem, not the solution. Somehow politicians and economists have convinced themselves otherwise. At best, increased debt and more spending is a temporary fix.

“Record deficit of $482 billion forecast for 2009,” blares the Financial Times. And that estimate doesn’t include tens of billions worth of additional “off budget” items (as if somehow “off budget” spending doesn’t count as part of the deficit). Yet, many financial conservatives (see here and here, for example) will tell you not to worry because as a percent of gdp, the deficit is actually slightly better than it was 25 years ago. They casually dismiss the deficit as ultimately inconsequential.

But the deficit does matter! The fact that today’s debt-inflatedgdp is not the gdp of 25 years ago is completely missed. Back then, the gdp represented a much greater percentage of production. Today it more largely measures spending.

And now, as the economy sheds jobs, the banking sector tightens lending, and people don’t have so much money to spend, voters wonder, What could have possibly gone wrong?

“The whole economic model was a scam. You can’t really get rich by spending more money,” writes the Daily Reckoning. “It’s saving money … and investing it in productive enterprises … that makes you rich. Yet, for the last 30 years, the feds have been encouraging consumer spending as a way to boost the economy. Wall Street turned over trillions of dollars—pretending to ‘add value’ by better allocating capital and credit. What it really did was pay itself huge fees for loading down the whole society with debt” (July 28, emphasis mine).

When you borrow too much money, eventually you are going to suffer when you have to pay it back. That’s just the way it is.

And if you are looking to the stock market to bail out your finances, you may want to reconsider. It is no coincidence that the marathon bull run of the past several decades occurred alongside the greatest expansion of debt the country has ever seen. Now that borrowing isn’t so easy, it could be the bear’s turn. And the bear is hungry.

“Leverage up some more, buy stocks and hope they go up enough to pay back the principle,” people were told. So investors bought hedge funds, which leveraged themselves with debt at 25 to 1, 50 to 1, and even higher.

But what happens if credit tightens and the stock market goes down? The answer to that question was always a little vague. Debts eventually need to be repaid—but where is the money going to come from? From selling more stocks! Won’t that just push the stock market even lower and trigger more margin calls, leading to more selling again? Yes. And couldn’t that become a vicious cycle? Yes.

According to the Chicago Tribune, dark clouds may already be forming over the stock market as investors try to reduce risk. Even Calpers—the California Public Employees’ Retirement System plan, one of the largest retirement plans in the U.S.—is trimming its exposure to stocks. Forouki Majeed, the senior investment officer for asset allocation and risk management, said that for the last 10 years, stock market investors have seen virtually no return.

So the myth of the stock market as a generator of wealth may be a scam too. Compared to the rising price of consumer essentials like gasoline, the Dow Jones has actually gone nowhere for the last 40 years—imagine that, risking money for 40 years and reaping virtually no return. What returns investors do have are being wiped out by the falling dollar. Measured against the euro, the Dow Jones Industrial Index is back at 1999 levels.

Investment manager Jeremy Grantham half-jokingly told investors recently that the only good investment right now would be a big mattress—meaning that in the current precarious economic climate, and with so many banks on the edge of failing, it almost makes sense to do like people did in the 1930s and protect your money by stuffing it inside your bed.

But stuffing money inside your bed probably won’t help this time. In the Great Depression, the dollar was backed by gold, so it had actual value. Today the dollar is fiat and can be created by the click of a computer button. As history shows, the temptation for governments to simply print up the money to pay the bills is too great and consequently, fiat currencies never retain their value long-term.

America is a debt-junkie nation living in a fairytale world where borrowing and spending can go on forever. Just ask your neighbor, or the woman in the check-out line, or the guy at the basketball game.

“Yes, I own a house,” or “Yes, that’s my Toyota,” he or she might say.

But is it really theirs, or is it the bank’s? Is the furniture inside their five-bedroom ranch theirs, or is it a “no payment or interest until 2010” deal? Is the flat-screen tv really theirs, or is it the credit card company’s? Does their cell phone really belong to them, or is it a part of a two-year contract?

You see? America has lots of “things,” but how much is actually owned and paid for? And how many of those “things” that we indebted ourselves for will still be here and in working order in five or ten years?

When it is all tallied up—mortgages and home equity lines of credit; credit cards, vehicle loans and business debts; municipal, state and federal debts; Social Security, Medicare and Medicaid liabilities; and underfunded pension plans—most Americans will not only find out they aren’t nearly as wealthy as they thought, but that as a whole they are downright broke!

At one point America was a net creditor nation. Now it is the world’s biggest debtor. There was a time when, financially, America was the richest nation on Earth.

But believe it or not, the root cause of that prosperity did not have to do with any physical American innovation.

A little more than a century ago, America’s greatest thinkers attributed America’s vast wealth and power to Almighty God. “We find ourselves in the peaceful possession of the fairest portion of the Earth,” Abraham Lincoln said, “as regards fertility of soil, extent of territory, and salubrity of climate. We find ourselves … the legal inheritors of these fundamental blessings. We toiled not in their acquisition or the establishment of them.” Lincoln looked upon our vast wealth and power as an inheritance from God—something we did not earn ourselves.

Similarly, George Washington believed America would have never come into existence without God’s blessing. Benjamin Franklin went so far as to compare early America to the biblical Promised Land. He called the original American colonies “God’s new Israel.”

These men, and many others like them, knew it was God who gave America its unprecedented prosperity and power.

You can read about why God gave America so many blessings, and why He is now taking them away, in the The United States and Britain in Prophecy. This book gives the answer to the underlying causes of America’s current economic trouble.