In the grip of the worst economic crisis since the Great Depression, America has undergone radical changes. Greed is no longer good and luxury is a shameful word. Paul Harris in New York analyses the tests facing the new president of a shattered nation

When writer Héctor Tobar returned to America last year after seven years living in Latin America, he came back to a profoundly changed land. He had left a United States riding an economic boom. House prices were soaring, suburbs were gobbling up farmland and good times were rolling on Wall Street.

Now all that has gone. Tobar, an acclaimed author and essayist, was stunned to find America in the grip of an economic turmoil that was changing his native country before his eyes, plunging it into the worst crisis since the Great Depression. "There is a sense of mourning and confusion and a real feeling of living in the last days of empire," Tobar said.

This new America is what Barack Obama has inherited. It is in many ways a broken country. When Obama takes the oath of office on 20 January watched by millions of Americans, his burden will be heavy in the extreme. The scale of the disaster is so large that Obama being America's first black president will almost be a historical footnote. The numbers describe the extent of the catastrophe best. Seven trillion dollars has been wiped off a stock market that has dropped 33%, its biggest fall since 1931. Two million jobs have disappeared, wages are frozen and millions have lost their homes. The Federal Reserve is printing billions of dollars to keep the economy afloat. Banks have been part nationalised and the car industry of Detroit - once the symbol of the all-American lifestyle - is on life support and may not see the end of 2009.

These terrible facts are accompanied by a profound cultural shift. The era of individualistic consumption that swept aside the Great Society of the 1960s has come to an end. For three decades, American culture has celebrated the glories of unabashed capitalism and the ideals of the rich. No longer. From Hollywood movies to celebrity culture to television, frugalism is taking hold. Consumers are cutting back. Luxury brands are falling by the wayside. Even the excesses of the sporting world, from the Super Bowl to Nascar, are being curbed.

A national belt-tightening is having an impact on everything from restaurants and books to a collapse in the demand for cosmetic surgery. The recession is reshaping the cultural landscape in which ordinary people live their lives. As it prepares to inaugurate a new president, America is also trying to forge a fresh identity in a world unimaginably different from the one inherited by George W Bush only eight years ago.

Mike Levine, founder of leading Los Angeles PR firm Levine Communications, believes the cultural change is even hitting the ethereal world of the über-rich celebrities who inhabit La-La land. Gone are the days of bling and Beluga caviar, of quaffing Krug in high-end clubs and driving around Hollywood in a Hummer. "The new year will be marked by a cultural trend I am calling 'Luxury Shame'," he said. "In the extraordinary recessionary times, it seems vulgar to flaunt one's luxurious lifestyle."

Paris Hilton - not usually a name associated with economic hard times - has already run foul of the new cultural mood. On a trip to Australia for New Year's Eve, a shopping splurge on luxury items earned her a barrage of negative headlines. On the TV show Entourage, which normally celebrates its male cast's acquisition of brand-name products, the rapper Bow Wow recently bought a Toyota Prius.

"I caution even the most successful celebrities to go bling-less," Levine said.

Perhaps not coincidentally, several forthcoming Hollywood movies, such as Clive Owen's The International, have as their main villains banks or financiers. In a recent trailer for the film, Owen's character is seen preparing to execute a rogue banker at gunpoint - no doubt a satisfying moment for many multiplex audiences.

Many experts see the cultural rejection of luxury and excess as a watershed moment which for many Americans seemed to descend out of a clear blue sky. "This is about a rethinking of the fundamentals that comes about because society is suddenly under a large amount of stress," said Miles Orvell, a professor of American studies at Temple University in Philadelphia.

It certainly seems a cultural milestone every bit as significant as the election of Ronald Reagan in 1980, which ushered in an era of conservatism, deregulation, free markets and muscular nationalism. The Reagan revolution ended the progressive era of presidents such as Lyndon Johnson and John F Kennedy. It celebrated Wall Street and making money. It was the era of Gordon Gekko and Rambo.

The presidency of Bill Clinton did little to change its course, and it continued unabated into the Bush years as hedge funds became the new masters of the universe and America became the world's only superpower. In both high finance and global politics, it seemed that the wealthy and powerful had written their own rulebook.

But, culturally at least, that book is being redrawn in the face of the recession and the election of a president whose mantra was based on rejecting conflict and trying to forge a consensus. Cultural historians now see echoes of the 1930s when the Great Depression inspired works that focused on the troubles of ordinary people, such as John Steinbeck's The Grapes of Wrath and the non-fiction of James Agee, whose Let Us Now Praise Famous Men examined poverty in the south. Orvell believes the coming recession will see a similar flowering of art and literature, reflecting the changed times. He is predicting a greater focus on community and an end to individualism as the dominant ideal.

"Stress brings new ways of thinking. This will have a profound effect on culture from people at the bottom to people at the very top, like Obama," he said. The new president is likely both to lead and to encapsulate these changes. Dealing with the economy is the number one topic in America, greater than Iraq, greater than the "war on terror". Obama's actions there are the yardstick by which he will be judged.

But the recession is already reshaping people's lives in ways trivial and profound. Sales of red meat are falling, while cheaper foodstuffs, such as pasta, are going up. Car sales have collapsed by up to 30%, perhaps meaning that the greatest American icon of the 20th century is struggling.

Frugal is the new cool, putting an end to hyperconsumption. The orgy of credit card abuse is over. A website called Debt Proof Living launched a daily email tipsheet last summer which now has 100,000 subscribers. Oprah Winfrey forsook her annual holiday list of expensive gift suggestions in favour of more modest "favourite things". Salons and spas are seeing customers desert them as women pamper themselves on the cheap at home.

The demand for cosmetic surgery has collapsed with some clinics reporting a fall in patients of 30-40%. What was once seen as a standard luxury for the wealthy elite - inspiring the TV series Nip/Tuck - is now regarded as grotesque excess, alongside owning a polluting big car. "It's the new SUV," declared Victoria Pitts-Taylor, author of Surgery Junkies

Tobar sees the changes in America reflected in his own life. While living in Latin America he would return to the US with his young son. "He would always say: why are the cookies so big here? And he was right. Everything was bigger, including the people." That sort of excess, on everything from cookies to cars, is now on the way out. The era of supersizing is over. There has been a cultural humbling that makes consumption and sheer size more unacceptable than at any time in the past three decades.

New York Times columnist Bob Herbert has tapped into the zeitgeist better than most. In a recent column that became a huge hit across the blogosphere and a talking point on cable news, he took America to task. "I've got a new year's resolution and a new slogan for the country," he wrote before going on to eviscerate the culture of debt-spending, blind consumption and rampant consumerism which, he said, had created everything from the Iraq war to the housing crisis. Herbert's new slogan was simple enough: "Stop Being Stupid."

Hollywood is rightly often seen as the psyche of the American public. So perhaps it is no wonder that the villain of 2008 was Heath Ledger's chilling portrayal of the Joker. Transcending the comic book genre, Ledger created a villain who sowed anarchy and chaotic destruction with little regard to motivation or the consequences for the innocent. For many Americans, who have seen their houses repossessed, their pension funds wiped out and millions of jobs vanish, that is a pretty accurate reflection of what 2008 felt like. And that sort of destruction produces a cultural cost as well as a cultural shift.

Across America, theatres from Broadway to Hollywood are closing shows as crowds stay away. Attendances at the cinema are falling, hitting the production of new movies and putting actors and support workers out of jobs. Art galleries are closing, auction houses are laying off workers. The art market is going into a recession as deep as the rest of the economy. The great US sports are all being hit hard in a major blow to national pride. The National Football League has laid off 10% of its staff. Major league baseball has followed suit. Nascar, whose roaring car fans and Nascar dads became a demographic, has a hiring freeze in place.

And while luxury may fall out of fashion, it is not as if quality is replacing it. The stores that are booming in these grim times are the huge big-box outlets of Walmart and Target. Anyone expecting the recession to drive Americans back into the arms of quaint family-owned shops on Main Street is likely to get an ugly wake-up call. Low-paying Walmart, stuffed with cheap goods from China and with a famously union-busting management, is booming. So busy were the crowds at one recent sales day at a Long Island Walmart that one employee was crushed to death.

Neither will the recession and the collapse of the car industry immediately bring about a greener, more public transport-friendly America. Faced with hard times, Americans are not going out to buy electric cars or hybrid vehicles. They are too expensive. Instead, they are patching up and mending their old gas guzzlers and keeping them on the road longer. America's sense of rugged individualism and distrust of government solutions will remain, for good or for ill. In this sense Obama's new America will be just like the old one.

"It is too deeply ingrained, that sense of the individual. It was right there at the founding of the republic," said Tobar.

The hard times are also bringing real pain to the most vulnerable. In Los Angeles, calls to suicide hotlines are up 60%. Like the first wave of a pandemic, the crisis is picking off the weak first. It is hitting the young, who cannot find jobs in a marketplace where employers are not hiring and the old are refusing to retire because of their wrecked pensions. It is destroying the lives of ten million or more illegal immigrants, who are the first to lose their jobs in a weakened economy.

Americans have even started doing their own gardening, which may be great for them but has put thousands of mainly Mexican landscape crews out of business. Similarly with restaurants. As Americans stay at home more, eateries across the nation are closing down and their mostly immigrant kitchen staffs are being laid off. Money sent back to Mexico by illegal immigrants, which supports many communities there, is down about 7% on last year.

The truth is that the rippling impact of the broken America that Obama is inheriting has spread out across the world, just as the influence of Reagan's policies once did. America now is more frugal, less consumerist and more community-minded. But it is also poorer, angry and afraid.

Obama's job is to address those fears. America is a country desperately looking for a new president who can provide the answers to its problems. But this will be no easy task. Obama is truly inheriting a different country than his predecessor did. It is too early to say whether it is a better one.

Scale of the problem

The size of the US economic collapse is huge. Here are some of the main problems Barack Obama will have to face as 44th US president.

• Almost $7 trillion has been wiped off the stock market as Wall Street posted its worst performance since 1931. Millions of retirement plans and pensions were devastated.

• Some reports predict as many as eight million home repossessions in the next four years.

• Obama aides are working on a fiscal stimulus plan worth $850bn over the next two years, much of it for infrastructure projects, in effect a second New Deal.

• More than 1.9 million Americans lost their jobs in 2008 up to November, and the year may end up at 2.3 million, the worst total since 1945.

• Consumer spending has dropped at the worst rate since 1980.

• House prices have declined at the fastest rate since the 1930s. The economy has been shrinking for 12 months with no end in sight, making it the largest downturn for a generation.