The US economy has been in trouble for some time. One of the major reasons has been the subprime crisis (lending to people who can't afford the mortgages). You may think that this is just bad for the lenders but that couldn"t be further from the truth. The problem is that the lenders packaged the bad loans together and sold them to funds. So your bank, mutual fund, hedge fund etc... is holding all of these horrible mortgages.
Add to this that real estate prices are falling hard, and everytime someone defaults whoever holds the mortgage ends up with a property that can't be sold - and one that has been devalued.
What we are seeing now is nearly the entire financial sector of the market holding billions of losses that they haven't even disclosed yet. The firms that insure mortgages are also in huge trouble and will go belly up unless they are supported by the very banks they are supposed to protect.
Then as you've seen the Federal Reserve is lowering interest rates in a very late attempt to save us from a recession that we are already in. They should have taken this action in mid 2007 and it's simply making things worse by lowering rates as fast as they are as late as they are.
Every time they lower rates they decrease the value of our dollar. (no one wants a currency that is paying less and less). With the devalued dollar guess what happens? Inflation. And inflation is what the fed is afraid of.
So why are they lowering rates so fast? Well with the subprime crisis you have adjustable rate mortgages that are linked to these rates. So lower rates are thought to help everyone who owes money. Unfortunately as I said it has a huge detrimental effect on our dollar which means our goods will sell for much less around the world than they have been. (which means our corporations make less money and have to raise prices - leading to inflation. Killing inflation means RAISING rates not lowering them).
On a recent trip to Las Vegas I had a very interesting conversation with someone from Britian. We were at one of those GIANT Nike stores and was telling me that the British pound was worth TWICE what the Dollar was. That meant that he could go and buy shoes for half the price we can buy them since his currency is worth twice as much as ours. It gets worse... in Britian Nike shoes sell for MORE than they sell here. So in effect he was buying them for about 30% of what he would pay at home.
I'm sure you've also heard that the Canadian dollar (whatever they call them now... loonie toonie?) is now worth about what our dollar is worth. Going to Canada usually meant paying about 70% less for us for a LONG time. Now they are coming here to vacation.
What else is happening? Overseas buyers are coming and buying our falling real estate because they can get it at a discount and because as with the Nike example they are getting twice the value of our currency.
I could go on and on but I'll finish with a some somber facts.
We entered a Bear Market in the stock market November 23, 2007. Of course this hasn't been widely reported but anyone who follows the market knows it happened. We were in a Bull market from June 1, 2003... and it's over. The last bear market lasted about a year and a half.
So if you do have money where do you invest it? In a falling stock market or in interest bearing instuments that are getting lower every time the Fed lowers rates. Yes... it's a terrible situation.
Add that we've been in a recession at least since fall of 2007 and we have a very scarey situation.
Of course if you go over and review history you will see that this cycle of good and bad economies has been going on since our country started.. so we will get our of this. The question is how painful will this be and how long will it last... and finally...
When will the government admit that we are in a recession and a bear market?