The reason why this is having a global impact is because the US banks borrowed money from European, Chinese and other non-US financial centres to fund their acquisition and packaging of sub-prime mortgages into mutual funds and also because the investors who ended up buying these mutual funds were not just in the US, but in various economic markets.

When the US banks started losing their capital because people were defaulting on their mortgages, they started to lose the means to pay back these loans and cash flows started to stop. When the foreign banks didn’t get their money back, they too had to restrict their cash flows. This means it became harder for companies to purchase new equipment or hire more workers to build more products, and individual consumers not being able to get loans to purchase items like new furniture from retailers. With people and companies buying less, companies not directly involved started losing money and, well, I think you can see the downward spiral effect.

That’s what I would call the short answer to your question. To learn more about this, read the entry on Wikipedia on the current economic crisis (a bit technical at times, but still quite informative) as well as this humourous, but sharply attuned interview sketch by John Bird and John Fortune where they discuss the whole sub-prime mortgage/mutual funds fiasco. Their skit will really help you appreciate how this situation spread out from the US to other markets.

Hope this answers your question and I’m glad you have a better understanding of the current economic situation.

This helped me out immensely in understanding the global crisis. I was just wandering, how did this lead on and affect other countries? I am not sure I quite grasp how the credit crisis lead to a global economic crisis when it was only America?

Again, thanks for sharing this other valuable resource for fellow consumers to help educate themselves about the current economic crisis.