Heading into the new year, the financial media will be making much of the Obama administration's fiscal stimulus plan, infrastructure rebuilding and other news out of Washington.

But what we really need to be paying attention to is the dawning realization among America's baby boomers that rising asset prices can no longer support debt-to-income ratios of nearly 140%. As that happens, a 20-year credit expansion and associated consumption binge will come to an end.

Anecdotally, I am already hearing this from my own friends and family members. Every time they get some money from a bonus or investment, in these fearful times it is going to pay off a home equity line of credit, a second-home mortgage or car loan, not to buy something new.

This new frugality, will likely have profound impacts and long-lasting reverberations that will reshape the global economy. Remember that roughly 20% of all the economic activity on Earth is tied to the American consumer, of which the boomers are dominant.

One key result will be deflation, or at least dis-inflation. Although normally benign or even beneficial when it comes through productivity gains and technological advances, recessionary deflation is a completely different beast especially when accompanied by high debt levels.

Despite the Federal Reserve's best efforts, expect to see more debt repayment, increased savings and asset liquidation as people offset hits to their household balance sheets.

Through the third quarter, households have lost more than $7 trillion in total net worth this year. End-of-year losses will likely exceed $12 trillion. With retirement looming, wages flat, investment accounts down and credit harder to get, consumption will continue to plummet.

The high-end retail sector will be ground zero for the fallout, as the rich join the middle classes for once in feeling the pain of a slump.

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