Act I of the Fall of the American Empire is probably about halfway done now.
This first act of the "play" began with the vanishing of all the phony wealth in the derivatives, the subprime mortgages, the bogus "securities" based on said mortgages, and so on. As all this money is sucked out of the economy, we are seeing epic declines in GDP, and businesses failing left and right. This process, while well underway, is far from over, because the other shoe is about to drop: the crash in public-sector spending at the state and local level. My state of California is wrestling with this now, and state spending is about to go off a cliff. Moreover, there are talks of tax hikes, which will pull money out of the economy at exactly the moment when such a drain can least be afforded. All of this will suck still more billions out of the economy, deepening the crash. We could see this ricochet back and forth two or three times, as the public-sector spending crash causes waves of foreclosures and loss of private-sector activity, which depresses tax revenues, which necessitates still more spending cuts and tax hikes, and so on.
Act I ends when the crash...or, actually, the interconnected series of crashes...ends. The crashes will end when assets are marked back to their true value, and demand reflects what real people working real jobs (at least, such as are left after the bloodletting is complete) can afford. This means no more NINJA loans, no more fake money.
Act II begins soon afterwards. Act II could best be titled, "The Aborted Recovery." As the massive disequilibria built up over the past four decades resolve, businesses and consumers will start to peek out of the trenches, and a slow, uneven recovery begins. The recovery may be quicker if government acts to try and reflate the popped bubble of housing that helped caused the crashes of Act I. However, the recovery will be doomed to fail. Painful as the markdowns and revaluations and foreclosures and bankruptcies of Act I will be, they will fail to permanently address the most serious, intractable disequilibrium of all: the yawning (and growing!) gap between the amount of energy our civilization uses, and the amount of energy nature provides for us (oil). If anything, the crash of Act I will make this worse by bringing oil prices down and destroying incentive to conserve oil and find new sources of energy.
Act III, the Oil Crash, will be far worse than Act I. You see, Act I merely involved a matter of money. Monetary imbalances usually resolve themselves within several months to a few years, if government stays out of the way and just makes sure no one starves. The Oil Crash is different, for it involves a permanent shortage of a fundamental resource: crude oil. And the shortage will impact just about every aspect of American life. If you managed to keep your job and manage your finances decently, you could dodge most of the Act I "bullet." Not so Act III. In Act III, we will see the recovery aborted and the economy fall back into depression.