The game in which Americans live beyond their means—and the bills never come due! Until they do.

The rules are simple: Spend, borrow, consume. Debt is good; saving is bad. Buy toys and blue jeans—and everything else—from the Chinese, and pay for them with ever-cheaper dollars. Import high-priced oil, and borrow from the sheiks to pay for it. Build your dream house, and finance it with a subprime mortgage, which then gets turned into a high-quality investment and sold to your pension fund—or maybe the Japanese.

The trick to staying in the game is always to consume more than you produce, and never borrow less than someone will lend.

The only way to win is to keep on playing.

For a while, the American Dream seemed to be a game filled with winners but no losers. Most Americans felt wealthier and had more (borrowed) money to spend. The economy kept growing, driven largely by the housing boom. Bankers and investors got rich trading mortgages and other debts among themselves. Even the government won, because Americans were paying more taxes.

Then, two things happened. First, the supply of new players began to run out. By 2004, more than 69 percent of American families owned their homes, and there simply weren’t enough new buyers to keep the game going.

Second, in 2006 and 2007, interest charges on the massive number of new subprime loans started to automatically reset upward. Those who could barely afford their loans in the first place certainly couldn’t pay more. So they defaulted.

Foreclosures started rising, and new home construction and sales collapsed. Across the county, house prices began falling for the first time in decades. Nationwide, average prices are down more than 12 percent from their peak, but two and three times more in places like Florida, Arizona and California where prices had risen the most.

The bursting housing bubble meant the game had turned ugly. Construction jobs disappeared, and the real estate industry began to implode.

More importantly, the façade of prosperity—the American Dream—enjoyed by millions began to crumble as the value of homes fell. Today, almost 9 million families owe more on their houses than they’re worth, and 6 percent of all borrowers are behind on payments.

But what is really transforming the game is the unfolding credit crisis.

Bankers had almost magically changed subprime loans into prime-liking investments and sold them to investors worldwide, including pension funds, retirement accounts and other financial institutions. When mortgage defaults began to rise, investors started to lose money.

As those losses continue to spread, banks have become less willing to lend, not just to people looking for mortgages but to anyone—including each other.

This credit crisis threatens to turn the burst bubble into a deep recession.

Over the past year, the number of unemployed has risen to 7.4 million with 600,000 people working part time. And over the last year, another 1.3 million have left the workforce altogether—a group that isn’t officially counted as unemployed.

Put those numbers together, and the weakening economy has already affected more than 9 million workers…and counting.

Every game needs a twist to make it interesting. In this one, the surprise is that the price of necessities like food and energy have surged, squeezing already-stressed pocketbooks. Many families are suddenly faced with only bad choices: Pay for food, or pay the mortgage.

So much for the American Dream.

The upper and lower classes speak: Average Americans from Fayetteville, N.C. describe the deepening costs of the recession in our man on the street video, and Wall Streeters explain how the economic crunch is affecting their lives.

Rules of the Game

Wanna play? The rules are easy, but the outcomes can be scary.

1. BUY A HOUSE, ANY HOUSE

Since 1998, almost 6 million people have used subprime loans to buy their houses, including 1.5 million first-time homeowners. Many of the borrowers did not understand the conditions of the loans they received and could not afford them when the interest costs automatically went up. However, for a while everything looked great. Home construction boomed—a record 5.7 million new houses were built during 2004–2006—and home values increased dramatically. Outstanding mortgages reached $11 trillion.

2. ASSUME HOUSING PRICES ONLY GO UP

The value of the average new house increased by one third between 2000 and their peak in 2005. For most Americans, their homes are far and away their most valuable asset. So bankers invented loans that let people borrow against rising housing values. Since 2000, homeowners borrowed—and largely spent—an astounding $1.3 trillion against the inflated values of their homes. Everybody felt richer.

3. EARN LESS, SAVE NOTHING

The average American family hasn’t had a raise in years and, other than the equity in their house, isn’t saving anything. Today, the typical household earns around $48,000—a bit less than when President Bush took office in 2000. Further, American families on average have been saving less than 1 percent of what they have earned since 2005.

4. TURN HIGH RISK INTO LOW

To make more money, bankers sold their subprime mortgages to other investors. To make those mortgages easier to sell, they packaged them with less-risky loans. As a result, many investors thought they were buying prime investments. The truth surfaced when the defaulting on subprime mortgages began. So far, financial institutions have written off roughly $200 billion worth of these loans, and this amount seems likely to double in coming months.

5. GET FOREIGNERS TO PAY

Unlike Americans in recent years, foreigners tend to save a lot, and they have been willing to pay the bills that Americans can’t. As a result, U.S. foreign debt now exceeds $13 trillion, which is owed to creditors worldwide. In addition, when banks like Citibank and Merrill Lynch lost billions on their subprime loans, they turned to foreign governments from Singapore to the United Arab Emirates to Saudi Arabia to make up the difference.

6. PAY WITH CHEAP DOLLARS

No one likes to repay their borrowings at 100 cents on the dollar if they can avoid it. For the U.S. as a whole, that means paying foreigners with cheaper dollars. Partly because the Fed has driven down interest rates to very low levels, the value of the dollar has fallen to record lows. Measured against other currencies, today’s dollar is worth roughly 40 percent less than in 2002. But how long will foreigners accept a currency that is losing value every day?

The Players.

From banks and foreigners to the Fed and your next-door neighbor, everyone is playing the game. In our interactive graphic, learn how all parts of the social and economic stratum are dealing with the recession (and who’s winning).
Playing the Game: Spin the die in our interactive game to learn how each step contributes to the deepening economic hole.Every Game Has a Winner

Despite the many losers, some people are making lots of money in the recession.

The line of losers gets longer every day: families losing their homes, workers losing jobs, consumers being squeezed by higher gas and food prices, investment funds collapsing, banks writing off bad loans and investors watching their portfolios melt down.

But somebody must be winning. This is who:

Foreign investors find bargains

Foreign investors, who have watched the value of their loans to the U.S. decline as the dollar has fallen, can now buy American companies, real estate and banks at a fraction of what they cost just months ago.

Farmers sowing new fortunes

After years of depressed markets, farmers are seeing prices soar for almost everything they produce, from grains and meat to eggs and milk. Bad weather, rising energy prices, increasing ethanol use and the demands of the growing global middle class are adding up to dramatic improvements for this group. Their net incomes are expected to increase to a level almost 70 percent above the last ten-year average.

Commodity speculators cash their bets

Commodity speculators have bid up the prices of everything from steel and oil to soy beans and gold. In a world where financial investments are losing value because of the credit crisis, hedge funds and others have poured billions of dollars into commodities. In the short run, those bets have paid off. But with declining demand, can the price of oil—and everything else—keep rising endlessly?

China and Russia are emboldened

Chinese demands for commodities—and their ability to pay with dollars earned in America—are redrawing the geopolitical maps of Africa and Latin America. For Russia, oil and gas exports are giving them new influence over energy-dependent Europe. The influence of both countries if growing while U.S. influence wanes, partly because of economic weakness.

Oil exporters pump black gold

Oil exporters have piled up fabulous surpluses as the price of a barrel of oil pushed beyond $100, leading to higher gas prices and bigger fuel bills.

Game Over

With the economy spiraling out of control, maybe it’s time to change the rules—or play a new game.

Americans like predictable rules, and they love winners. But in the current ecoomy, the loses are adding up. Even worse, too many of the losers are voters, and this is an election year. So it wouldn’t be surprising if the rules suddenly change.

Thus far, the usual solutions to economic crisis—government hand-outs and lower interest rates—have failed.

The problem is an excess of bad debts and bad credit, and no one has yet figured out how to restore confidence. The result is that financial panic is spreading.

The ultimate solution might be for the government to buy all the debt and nationalize the losses, a bit like the savings and loan bailout of the 1980s. The Federal Reserve’s support of JP Morgan’s acquisition of Bear Stearns—which was overwhelmed by a classic “run on the bank”—points in that direction.

The problem is that there is more than $7 trillion in outstanding mortgage-backed securities, and there are more banks like Bear Stearns that are overextended. The Fed can support one rescue, but even a few would be fabulously expensive and would run the risk of a future inflation surge.

Such radical action would take a political mandate—like what Franklin D. Roosevelt had when he came into office in 1932 at the height of the Great Depression. We aren’t there, yet.

The fact we’re even imagining that possibility means the American Dream might turn into the American Nightmare.

Smooth Operators: watch as the highest politicians of the land (even those running for president) try to make the best oratories about the recession.