High debt-finance based on unlimited credit to feed high consumption. Little or no savings in the bank. People were living way  beyond their means. Negative equity, reverse mortgaging to fund  materialism. 

Real estate agents: "Property values double every two or three years and make you rich from doing nothing. Buy a house, guaranteed to get rich and you do not have to work. Real Estate prices never going down in value. Renting is dead money" 

When a portion of the economy gets out of line with the rest of the economy, a correction will follow.

http://www.smh.com.au/business/us-is-bankrupt-and-we-dont-even-know-it-20100812-12056.html

"Let's get real. The US is bankrupt. Neither spending more nor taxing less will help the country pay its bills.

What it can and must do is radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess.....

The fiscal gap is the value today (the present value) of the difference between projected spending (including servicing official debt) and projected revenue in all future years.

Double Our Taxes

To put 14 per cent of gross domestic product in perspective, current federal revenue totals 14.9 per cent of GDP. So the IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires, roughly speaking, an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as the payroll levy set down in the Federal Insurance Contribution Act."

The increase in Baby Boomer retirees will create a huge increase in government expenditure to pay for aged pensions and subsidize expensive health care. Will company and personal income taxes need to be increased to pay for the short fall? Maybe the population needs to grow and bring in more workers? Who will pay for the baby boomer retirements and health care plans? Another impending financial crisis.

Most of the self funded retirees super will run out and the tax payers will have to foot the bill for their pensions. What is the  solution to this problem?

@Numonex regarding http://www.bloomberg.com/news/2010-08-11/u-s-is-bankrupt-and-we-don-t-even-know-commentary-by-laurence-kotlikoff.html

The fix for Social Security is simple.

As Social Security stands now, the upper limit contribution rate is based off of an income of around $110,000/year. Henceforth, if I am pulling in $111,000/year, $200,000/year or higher, I am paying into Social Security at the same rate as someone who is making around $110,000/year.

The fix is simple, scale with multiple tiers for those making more than the upper limit contribution rate.

Medicare is the harder fix because when it was created in the 1960s under President LBJ's 'Great Society,' the poorest people in US society were the elderly and many of them did not live past 75 years old.

40 some odd years later, the wealthiest and happiest people in US society are the elderly many of whom will make it past 80 years old.

There is no simple fix for Medicare. If anything, the most logical would be to strictly ration healthcare for the elderly. For example, bar all elective surgeries after the age of 75 and make those aged 65 and older pay for entirely, out-of-pocket, for procedures such as hip replacements.

What we have now and will continue to persist is visible intergenerational inequity where the young and working are being taxed in order to finance the retirement of their parents and grandparents. I do not think it will get so bad to the point being old is a scarlet letter begging for a public lynching, but the sense of loss in comparison to what the Baby Boomers have is depressing.

For example, when my parents got out of school in Southern California in the late 1960s and early 1970s, they had an easy time getting a job because they knew someone who knew someone, the majority of jobs did not require any certification, and college was dirt cheap in comparison to today.

Nowadays, jobs that were once secure are being outsourced to India and the Philippines such as corporate accounting, every occupation requires some sort of license or certification, and college is $20,000 on up/year to live on campus at even the most spartan and lowest rated of 4 year public universities.

If anything, I predict a taxpayer revolt where the young and working in the next decade or two will be fed up with the "well I earned it argument" from retirees and elect politicians who are deadset on keeping taxes low, cut public employee benefits, take a more what is best for the American worker is best for the US economy stance regarding Free Trade, and fundamentally reshape expectations regarding retirement.

There are two trends to watch in America during the next decade or two:

1. Public attitude toward public employee compensation and benefits

2. Public attitude towards Free Trade . Specifically, outsourcing of what used to be reliable, middle class tax base jobs.

Where the US public falls on these two issues will make and break the economies of entire nations. If the public attitude is hostile and protectionist, then countries like the Philippines will feel it tenfold. If the public attitude is indifferent or resigned to it happening because they feel they can't stop it, then multinationals will continue with their search for the country with the cheapest labor and lowest labor standards.

Ironically, the public sector, liberal or conservative, should be concerned about outsourcing because their tax base is getting smaller when a US company decides to lay off 100 or more workers, restructure, and send those jobs overseas. The US public sector is directly threatened because if 100 or more jobs get outsourced then, then that means 100 or more individuals not paying into the tax base (ie their salary and benefits) at the same rate they were before.

You will see some strange bedfellows and it will be between those of different ideological lines, but share a common economic belief in what is good for the American worker is best for the American economy.

While you guys talk about our "sins" and "living beyond our means" (as if our production and consumption a few years ago, was nothing more than an illusion), I worry about deflation:

http://www.nytimes.com/roomfordebate/2010/8/11/should-we-brace-for-deflation-now/politics-may-get-in-the-way

Politics May Get in the Way

August 11, 2010

Mark Thoma is an economics professor at the University of Oregon and blogs at Economist's View.

It is unfortunate that economists use the word disinflation to describe a fall in the inflation rate from, say, 2 percent to 1 percent, and the term deflation to describe negative inflation rates. There is nothing special about crossing the zero inflation threshold, and as explained in detail here, both a fall in prices, i.e. deflation, or a less rapid increase in prices, i.e. disinflation, cause problems for the economy.

Actual deflation has not occurred very often in the U.S., the last episode was in the Great Depression, but disinflation has been much more common. For example, Ben Bernanke worried about disinflation during the 2001 recession and wrote quite a bit about how the Fed could reverse the process and stop it from turning into actual deflation.

What were those policies? Although inflation may be, as Milton Friedman famously claimed, “always and everywhere a monetary phenomenon,” it is not enough to undertake standard open market operations to increase the monetary base, i.e. giving households newly created money in exchange for financial assets.

Prices won't rise unless there is an increase in demand. If the new money simply sits in savings -- if it sits in bank accounts, cookie jars, and the like without causing an increase in consumption or investment -- no new demand is created and prices will continue to fall. In effect one form of savings, financial assets, is exchanged for another, newly created money, with no effect on demand at all.

How can new demand be created? One way that is likely to be effective but is also politically infeasible is a helicopter drop. Suppose, for example, that a helicopter flies over depressed areas and begins dropping bags of money (or, more realistically, the money shows up unexpectedly one day in people's mailboxes). Some of that money would be saved, but most would likely be spent driving up demand and prices.

Another way is for the government to bypass individual households and use newly created money to buy the goods and services itself. This will increase demand and drive up prices, but this is also problematic politically, and would take much, much longer to execute than simply printing and distributing more money by helicopter or through mailboxes. Deficit spending by fiscal authorities could also increase demand, but the government is unlikely to pursue a policy that is aggressive enough to move prices given current worries over government debt levels.

Finally, the Fed could announce a higher inflation target, say 4 percent instead of 2 percent, something observers like Paul Krugman have been urging it to do. This works because when people expect to pay more for goods and services in the future, they buy more today to try to beat the expected price increases. The increase in purchases raises demand and produces the increase in prices that people are trying to avoid.

Unfortunately, the Fed's determined effort to build up its inflation-fighting credibility over the past few decades may be working against it here. Even if a higher target is announced, it may not be believed. In addition, there are voices within the Fed that are very resistant to pursuing a higher inflation target because they believe it would undermine Fed credibility and lead to a permanent inflation problem.

Still, pursuing a higher inflation target is politically possible and has the best chance of producing the desired increase in prices. Some members of the Fed's monetary policy committee appear to have forgotten that the Fed has two obligations, stable prices and high employment. The Fed's credibility will not be protected by pursuing a policy that keeps inflation low, but fails to attack aggressively the unemployment problem. By one means or another, policymakers need to take action to generate new demand and offset the disinflationary forces that pose a threat to the economy's recovery.

==========================

That "money out of chopper" example, that my Macro professor used as well relates to this:  http://en.wikipedia.org/wiki/Fiscal_multiplier

And you guys worry about paying off debt? Wait till fucking deflation occurs.

Retirement will likely get replaced by catastrophic living insurance that is a variant of workers comp, but more permanent.  If you are unable to work, you then are done.  Retirement now will end up being akin to being independently wealthy where assets owned generate income so you can live.

http://ipezone.blogspot.com/2010/06/ordo-v-neoliberal-why-germany-clobbers.html

^Germany beats both UK and the US in soccer and economics. The German economic model of ordoliberalism is the only way to long lasting success. Out with neo-liberalism in with ordo-liberalism.