Ben Bernanke: America's economy is showing signs of a return to strength

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The ageing of America's population will have a major impact on the federal budget, most dramatically on the Social Security and Medicare programmes, particularly if the cost of healthcare continues to rise at its historical rate. Thus, we must begin now to prepare for this coming demographic transition.

The economist Herb Stein once said, "If something cannot go on forever, it will stop". That adage certainly applies to our nation's fiscal situation. Inevitably, addressing the fiscal challenges posed by an ageing population will require a willingness to make difficult choices. The arithmetic is, unfortunately, quite clear. To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programmes such as Social Security and Medicare, less spending on everything else from education to defence, or some combination of the above. These choices are difficult, and it always seems easier to put them off – until the day they cannot be put off any more. But unless we as a nation demonstrate a strong commitment to fiscal responsibility, in the longer run we will have neither financial stability nor healthy economic growth.

Today the economy continues to operate well below its potential, which implies that a sharp near-term reduction in our fiscal deficit is probably neither practical nor advisable. However, nothing prevents us from beginning now to develop a credible plan for meeting our long-run fiscal challenges. Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term.

Our economic challenges, both near term and longer term, are daunting indeed. Nonetheless, I remain optimistic that they can be met. History has demonstrated time and again the inherent resilience and recuperative powers of the American economy. Our country's competitive, market-based system, its flexible capital and labour markets, its tradition of entrepreneurship, and its knack for innovation have ensured that the nation's economy has surmounted difficult challenges in the past. I do not doubt that we can do so once again.

This is an extract from the chairman of the Federal Reserve's remarks to the Dallas Regional Chamber in Texas on Wednesday

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