Recent high-profile bankruptcies of mainstay American retailers, such as Sharper Image Corp. (SHRPQ) and Linens Holding Co.’s Linens ‘n Things, as well as the proposed mergers between Blockbuster Inc. (BBI)/Circuit City Stores Inc. (CC) and Delta Air Lines Inc. (DAL)/Northwest Airlines Corp. (NWA), and the admissions from the nation’s leading student lenders that their business models are no longer viable, mark the beginning of a long overdue overhaul of the American economy.  In short, the economy will be getting smaller and more expensive.

The success of all of these seemingly disparate sectors depends, to a large extent, on the ability of Americans to continue to borrow cheaply and easily.  Now that home equity extractions and zero-interest credit card rollovers can no longer be used to fund electronics purchases, vacations or tuition, those corresponding sectors are suffering.  The foundation of our bloated service-sector economy, supported by overseas savings and production, is now giving way.

This diminished capacity will result in a wave of bankruptcies and consolidations to restore profitability in what will become a much smaller service sector.  The days of cheap consumer goods from Wal-Mart Stores Inc. (WMT) and cheap airfares from JetBlue Airways Corp.