As America continues to watch as stock markets recede and job losses mount, many have yet to accept that the economic landscape has likely changed permanently. While the perennial pessimists may be premature in predicting the irreversible economic decline of the United States, there is no doubt that Americans are currently faced with major challenges that will take a long time to overcome.

Since the 2nd World War, except for the decade of the 70’s and some minor pauses for recessions, Americans have been treated to economic expansion and the improvement of their quality of life. Homes became larger, there were more cars in the drive way, entertainment options were expanded, etc. While some had warned for years that Americans were living beyond their means, a rising stock market coupled with rising home prices appeared to indicate that Americans could afford to increase their debt burden and did not need to save (as increasing asset prices were doing their saving for them).

Now, however, American confidence is eroding. While stock market losses now mean that many are not going to be able to retire when they were planning to, collapsing home prices mean that even young, responsible families are facing an economic drag. Leaving aside the damage to individuals who end up in foreclosure, people who purchased homes in the early part of this decade are often finding themselves so far “upside down” on their mortgage that they may actually end up paying more than the house is eventually worth, even taking into account that the price of the home will recover somewhat after the market hits bottom. The amount that these families eventually overpay for the home will effectively be negative saving, in that overpaying will consume resources that could otherwise be used to help fund retirement.

In addition to this burden, there is the added need to fund Social Security and Medicare. These two programs have been a major pillar in the American retirement system for two generations. While the funding crisis for Social Security is less immediate (and more solvable) than the one for Medicare, Americans are extremely likely to face an increased tax burden (as well as some benefit cuts) to help maintain the solvency of these programs.

While the economic outlook for America will eventually improve from its current negative one, Americans are likely going to be faced with a somewhat different array of economic options than what they expected. Being faced with a higher tax burden (not to mention the need to pay down historically high levels of consumer debt) means that American families are unlikely to have the resources to fund their previous levels of consumption and save for retirement at the same time. Unless the stock markets (and housing) begin to generate returns that were seen during the internet and housing booms, thereby relieving individuals of the need to necessarily save a lot (not likely), Americans are going to be facing choices similar to those faced by their parents and grandparents. Either one will save more now (and possibly have a decent retirement), or one will consume more now (and likely have more limited options in retirement). Although America will likely continue to be the location to which the world’s poor and dispossessed gravitate, the changes to the economic landscape that have occurred mean that Americans are going to have to return to the values of previous generations (frugality), and likely lower their lifestyle expectations as well.