The popular media is highlighting credit expansion among consumers as proof that the U.S.economy is growing and consumer confidence is returning.

As I’ve written in these pages before, student loans have just exploded over the last few years. What if, dear reader, we remove student loans from the “wonderful” credit expansion numbers that were just released supposedly exhibiting consumer confidence? Let’s have a look:

Consumer Credit Minus Student Loans

2008: $2.43 trillion

2012: $2.10 trillion

(Source: Federal Reserve)

Consumer credit has actually contracted during the last few years. The worst part is that—as my dear readers know—student loans are funded by and guaranteed by the U.S. government. Technically, it is government credit that is expanding with student loans, but the consumer is indeed saddled with the debt.

Sometimes the stars align in strange ways. In the same week that the popular media was raving about a consumer confidence comeback, the National Association of Consumer Bankruptcy Attorneys issued a student loan debt bubble alert, citing how its membership—more than 80% of all bankruptcy lawyers—has experienced a substantial increase in the number of clients seeking relief from student loans.

Student loans in 2011 reached a staggering $867 billion. Of the 37 million student loan borrowers, 14.4% are at least one payment behind.

Students and parents are more distressed about the college education expense, because the cost has risen dramatically. According to the College Board, tuition and fees at public universities have jumped 130% over the past 20 years.

If the bankruptcy attorneys are right and student loans are in a bubble, imagine the ramifications for consumer confidence should the bubble burst.

Just like the housing bubble, people would shy away from education after hearing the horror stories of homes being repossessed to pay off student debts. Worse, others would hear about the bad credit rating students would have, which would prevent them from being able to make other large purchases.

Others would wonder how long it would take to repay student loans during one’s life, and how that extra debt burden would prevent someone from making other important life decisions.

What is the true value of an education in the U.S. economy, some would wonder?

Let’s put the bubble bursting scenario aside, dear reader, and focus on the effects on consumer confidence right now. The Federal Reserve recently reported that only nine percent of 29- to 34-year-olds got a first-time mortgage from 2009-2011, compared with 17% from just 10 years ago.

The first takeaway from the above, dear reader, is that consumer credit is not expanding. Thus the economic recovery and consumer confidence is not gaining traction, which means that stock market rally looks even more suspicious.

The second takeaway is that more people, aside from their regular debt, are saddled with student loans, which will continue to depress consumer spending and consumer confidence, which will be a drag on housing and theU.S. economy for years to come.

Where the Market Stands; Where it’s Headed:

It’s up, up and away for stocks again! The bear market rally is getting very near its top. A stock-buying euphoria may not be far off… the final big push to the top I've been expecting for the three-year-old stock market rally. Enjoy higher stock prices while they last, because they won’t for all that much longer!

What He Said:

“I see a deal when it’s a deal. And right now there’s a good “for sale” sign flashing on gold bullion and gold producer shares. In fact, after peaking at the $690.00 an ounce level earlier this year, gold could be a bargain at its current price of around $650.00 per ounce. As a reader, you are undoubtedly aware of my negative stance on the general stock market and the U.S.economy. As the economic problems continue to brew in the U.S., as these problems develop into others, and as they are finally exposed, what other investment but gold will worldwide investors turn to?” Michael Lombardi in PROFIT CONFIDENTIAL, March 14, 2007. Gold bullion was trading under $300.00 an ounce when Michael first started recommending gold-related investments. Many gold stocks recommended in Michael’s advisories gained in excess of 100%.