It was a year of surprise, but not the kind most look forward to; more like the feeling you get when you are sitting in school and the fire alarm goes off. This year, the jolt of adrenaline was felt by a whole swath of Americans: homeowners, lenders, real-estate agents, builders, and bankers alike.

Yet, through it all, if government statistics are to be believed, the economy kept chugging along, missing nary a step.

There are so many stories: Stock Market Record; Dollar Collapse; Housing Crash; Credit Crunch; White Gold, and Black Gold; Germany, China, Russia; Predictions of a Depression-Style Meltdown; the list goes on and on. Looking around, dazed and still partially suffering adrenaline-induced shakes, it’s hard to know where to begin.

Which was the biggest event of them all? It’s practically a 15-way-tie, but let’s begin with …

The Stock Market

Probably the brightest spot within the economy, investors’ pocketbooks swelled and 401-k plans ballooned as the Dow Jones industrial average, in July, surpassed 14,000 for the first time ever.

Yet the record isn’t that impressive after adjusting for inflation. For example, if you had bought the Dow Jones at its peak in January 2000, after adjusting for inflation and using the government’s own statistics, you would still be in the hole. Other indices like Nasdaq and the Russell 3000 index have performed even worse. In real terms, the stock market has not broken into new highs at all.

If you owned shares in banks, lenders or homebuilders, then 2007 was a particularly rocky year. Citigroup is down 45 percent; Washington Mutual, down 69 percent; Toll Brothers Inc., down 32 percent. About the only major bank to escape unscathed was Goldman Sachs—but it only escaped because it unscrupulously made major bets (short sales) against the very subprime products it was pushing on investors.

The Dollar

You know the sound a submarine makes when it dives?—the siren that blares when a torpedo has been fired and the captain yells Dive, dive! That was the sound the dollar heard almost all year long as it repeatedly broke records, hitting new all-time lows day after day.

“Dollar Continues to Plummet” became a broken record. Other, more revealing headlines—including: “Qatar, Vietnam Dumping the U.S. Dollar,” “China Holds Debt Knife to U.S. Dollar Throat,” and “Japanese Pay for Oil in Yen”—show that a big factor behind the dollar’s fall is simply that much of the world no longer wants as many dollars.

Why not? One reason is that America is becoming a credit risk—but more on that later.

At its lowest point, the dollar had fallen more than 11 percent on the U.S. Dollar Index, before bouncing back in December. Against the euro, Canadian dollar, gold and oil, the dollar did even worse. The euro hit an all-time high of $1.49 this year, while the Canadian dollar hit a 30-year high, for a while becoming more valuable than the greenback. Gold soared to within a hair’s width of a record $850 per ounce, while oil just barely missed $100 per barrel. The coming year will tell whether something fundamental has changed, or if December’s signs of recovery are just a “dead cat bounce.” The dollar’s long-term direction remains decidedly down.

If all this talk about diving submarines wasn’t putting enough pressure on my ear drums, the news about a popping housing bubble really blew them out.

Housing Crash

Read what we wrote in our “2006 U.S. Economic Year in Review.” In it, we began the section on the housing market by stating, “2006 leads us to believe that a deflating housing bubble could be one of the big stories of 2007.” Headlines prove that forecast correct: This past year we saw a blizzard of headlines like “Home Builders Are Desperate,” “Housing Slowdown Spreads to Secondary Industries,” “U.S. Foreclosures Continue to Surge” and “Home Prices Falling.”

This past year definitely saw the air begin to leak out of the housing industry: In October for example, new home construction fell 16 percent. New home sales dropped 23.3 percent. Existing home sales fell 19 percent. Foreclosures are up double and triple digits in most states. In California, foreclosures shot up 213 percent in October from the same month the year before. Alaska, Arizona, New York and Maryland saw foreclosures soar 157, 129, 51 and a whopping 818 percent respectively over the same period. Only seven states had foreclosures fall.

Yet in the midst of these negative statistics, home prices actually haven’t dropped that much, and may have significantly further to go. Nationally, home prices are down approximately 4.5 percent below last year—which was the first annual drop since the Great Depression, according to the National Association of Realtors.

According to a new survey by Moody’s Economy.com, many metro areas will record losses of at least 20 percent before the downturn is over. With over 1 million mortgages expected to default next year (up from 300,000 this year), 2007 may prove to be the beginning of a severe downward cycle. Already, job losses at banks and builders are intensifying.

And if you expect a quick recovery, unless banks reinstitute what were probably the most relaxed lending standards in history, you are probably too optimistic. Now that the housing bubble has burst, the news is filled with examples of how banks gave mortgages to just about anyone with a pulse—regardless of financial merit. Those days have gone the way of the dinosaur. 2007 saw the extinction of widespread subprime lending in America. And all the demand for houses, which was predicated on subprime lending, is quickly following suit.

Yet the biggest news that emerged from the housing mess was the mortgage- (and other asset-) backed investment con that America dumped on the world.

Credit Crisis

The Daily Reckoningsummarizes all the mortgage-related fraud associated with the housing-market collapse this way: “The borrower lied about his income, his assets, his age, his employment, his marital status and how many points were on his driver’s license. The appraiser lied about the value of the collateral. The lender lied about the terms and conditions of the loan. And then Merrill, or Citigroup, or Goldman lied about the quality of loans generally … and Moody’s backed them up!”

But that was only the beginning.

The story got really interesting once the banks bundled up all their mortgage loans into securities and sold them to foreign banks and investors.

Everything worked fine until home prices began falling and homeowners began defaulting in droves. Now some of the mortgage securities are approaching 27 cents on the dollar, and banks and investors are hemorrhaging money.

Now a whole chunk of the world is enveloped in a “made in America” credit crunch. Nobody knows how many practically worthless subprime-mortgage-backed securities each bank holds—and therefore how creditworthy each bank is—but everybody suspects the worst. Thus interbank lending has virtually dried up, and several financial institutions could be closer to bankruptcy than is generally thought.

So far, the central bank response of cranking up the monetary fire hose and dousing the system with liquidity has had little result. On December 18, the European Central Bank essentially offered “unlimited” credit to any bank that needed it over the ensuing two weeks. It also said it had made ready a massive half trillion dollars for banks needing temporary loans. The Federal Reserve Bank, the Bank of England, the Bank of Canada and the Swiss National Bank also announced similar monetary injections this month—that’s on top of the hundreds of billions they have been pumping into the banking system since the credit crunch hit in earnest in July.

The long and the short of it is that banks all around the world have collapsed or could be on the verge of collapse. Fingers are starting to point, and most are aimed back at U.S. lenders, banks and complicit credit ratings agencies. As a result, America’s creditworthiness is being questioned, producing headlines like this: “Foreign Investors Flee the U.S.”

2008 will probably show whether or not Northern Rock, the first British bank to experience a banking run in 140 years, was just the first.

Consumer Spending

In last year’s review we also noted: “Some estimates suggest that as many as 30 percent of all jobs created since 2001 have been associated with the housing industry. If housing slows, so will consumer spending and the economy.” As a percent of the economy, consumer spending now accounts for 72 percent of gross domestic product, up from 71 percent last year.

The economy is critically dependent on the consumer—but will spending hold up in the face of falling home prices, restricted lending standards, and cutbacks in banking, real estate and residential building? As we said last year: If consumer spending goes down, so will the economy.

Judging from the soaring number of credit card delinquencies and poor sales at stores like Target, consumer spending might be about to take a hit. Nevertheless, predictions have abounded for many years about the retreat of the American consumer—yet consumption has continued to increase.

But could 2008 be the year that consumers finally max out? If it is, then it won’t be just a fire drill that the economy is facing—it will be a real fire.

Alarm bells are ringing. The dollar is sinking, the housing market is plummeting, well-paying jobs are disappearing, and a credit crunch is threatening the solvency of the banking system. Are you prepared for a fire?

That said, through it all, the economy still managed to muddle along in 2007.

But we at theTrumpet.com don’t want our readers to have just a muddle-through year. As we said in 2006, we want you to have a great, direction-filled, purposeful year.

There are ways you can help ensure a happy, hope-filled year and future. Put God, then your family, first. Then work hard and smarter, keep abreast of the news, live within your means, eliminate debt, make sure all your financial eggs are not in the stock market, and don’t forget to give God thanks for the blessings you do have.

The Trumpet may often warn about negative events or trends developing in America, but it is because we don’t want readers to have to face the prophesied days of reckoning unprepared. God will protect you and your family, but it involves living by His way of life.

To learn how to live God’s way of life, please request copies of The Incredible Human Potential and The Seven Laws of Success.