The case reminded me of what had happened to my friend Jawa. When you are living so close to the hilt, any little problem can destroy your whole life.

And it doesn’t just happen to poor people.

In my financial planning business, I had mostly wealthy clients. One client had a car accident, while on holiday in Florida, and killed someone. When he rented the car, he had had the forethought to purchase maximum car insurance. It turned out, after the survivors sued him for one million dollars, that the car rental company actually only sold an overage insurance, which was to cover that portion of your liability not covered by your own car insurance. For most Americans, this would have worked out fine, because they have car insurance. But my client was a real New Yorker, living in Manhattan. He had no car insurance.

He will be paying off this debt for the rest of his life. Any plans he had for retirement were gone. The only reason his kids will even be able to attend college is because he had some type of prenuptial agreement with his wife, which established separate property, and his wife’s assets were not attached by this law suit. But now, his wife will be paying the entire college tuition for all three children, herself.

The recent mortgage crisis is full of stories of people who had been using their home as an ATM machine and because of sudden declines in real-estate values, those loans came due and people were unable to pay them. In some cases, this caused a domino effect of loss of home, loss of job, loss of credit, and eventually drove people into a seemingly inescapable poverty.

The credit crisis caused a lot of people to point fingers and throw blame. “They shouldn’t have bought a house they couldn’t afford.” Probably, but many of these people wouldn’t have had a house at all, unless they over extended.

The purchasing power of Americans has steadily dropped over the years, as the cost of living has increased. In 1971 very few Americans had credit cards. According creditcardstatistics.com, in 2009 there were 609.8 million credit cards in the US, which is almost double the number of people.

In 1971 the average home price was $24,000 and the average income was $10,000. Said another way, a house cost about 2.5 years’ salary. The down payment was about 3 months’ salary. Couples took a second job or worked weekends for a year to save $2,400 for their down payment. A new car cost about $2,000, or 20% of salary. The average college tuition, for their children, was $600, or 6% of their salary. Minimum wage in 1971 was $1.60. So, it was not unreasonable for parents to expect their kids to work part time and help pay for their education. In a single summer, kids could earn enough to pay their full tuition without any assistance.

In 2009, however, the average house cost was $270,000. But, the average US income was only about $42,000. So, the house cost 6.4 years salary. And the down payment of $27,000 represented more than half of a year’s salary. An average car costs $14,000 or 33% of salary. College costs in 2009 skyrocketed to $19,000. With federal minimum wage at $7.25 kids could barely earn a quarter of their college tuition in one summer.

In that financial climate, the average American was in a house he couldn’t afford. If the average, in other words, the majority of the population is forced into doing something that doesn’t make good fiscal sense, then the situation, not the people, must be called suspect.

If everyone is overextended, something is wrong, somewhere.

We all have seen stories on Jerry Springer or in the news about people on welfare buying themselves this or that extravagance that they shouldn’t have. Jawa had bought a leather jacket just a week before his life exploded from the towed car. Jawa had a cousin by marriage who was similarly poor, who paid $300 for a paintball gun that he had been dreaming of for years.

People pointed at those two purchases and identified them as the root of the two boys’ financial problems. But the truth is, the jacket was on sale for $125. The paintball gun was $300. Neither of these young men could have dramatically changed their lives for that amount of money. If they bought themselves a treat or didn’t, they would still have been poor.

Wearing a nice jacket or owning a slick paintball gun makes poverty a little easier to live with.

You can easily spend $6 on a large frapa-mochiati-chino at one of the many fashionable coffee chains in America, and now, around the world. That represents 1 hour of net salary for a minimum wage worker. It represents a quarter of an hour of salary for the average American worker. In theory, no one can afford a $6 cup of coffee. So, why do people buy it? Because it is an attainable luxury, that makes life livable. Everyone has $6, even if they shouldn’t spend it on coffee. If any coffee drinker wound up losing his or her home in the recent mortgage fiasco, could we blame the coffee? Would $6 have made a difference?

I lived in Tennessee for years and saw people who earned minimum wage or slightly above, buy a new car that they couldn’t afford. And when that decision wrecked them, people pointed a finger at them, “You did this to yourself.” Yes, and no. Take my friend Jawa, after the mess that caused him to lose his car and his job, he bought a brand new car.

Why does someone with no money buy a brand new car? Because you can get a new car with no money down. Jawa needed transportation. An affordable used-car cost cash. But someone with no money could drive off the lot with a brand new car.

And so the cycle of debt continues and actually worsens.

And again, this situation is not limited to the poor. I have seen upper-middle class families do exactly the same thing. They were barely making it financially. Then, the kids reached driving age, and the only way to give them a car was to go into debt with a brand new car, no money down.

Consumption is definitely a culprit in the financial plight that most Americans find themselves in. How many TVs do you have in your home? How many cars does your family have? Do you really need a swimming pool?

But the flip side is that it costs a lot to live, no matter how careful you are. As a result, even in one of the world’s richest countries, a significant percentage of the population slips deeper and deeper into debt.