At the beginning of the year I said the United States would enter a recession by the end 2007. It looks like that forecast is coming closer to fruition by the day.

Let's take a look at how the events are unfolding.

The housing bust is far from over. Early in 2007 I predicted the unwinding of the highly leveraged subprime housing market. That was dead-on, and the subprime debacle caused a potentially disastrous gridlock in the credit markets.

The massive leverage and almost fraudulent "slicing and dicing" of collateralized debt obligations (CDOs) eventually caused a major credit problem, itself a recessionary influence.

In addition, it was clear that a major downturn in residential housing was likely to occur and worsen. Well, it certainly happened, and it triggered a bursting of the incredible liquidity-driven asset bubble of the past few years.

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A worsening housing market would, sooner or later, affect consumer spending, which makes up 72 percent of gross domestic product (GDP).

Most Wall Street "experts" and "cheerleaders" ridiculed this view. Senior figures such as President Bush, Treasury Secretary Henry Paulson, and Fed Chairman Ben Bernanke said that our economy was "strong" and looked good into the future. Nothing to worry about, they said.

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The recent Fed cuts acted like a shot of morphine — the sense of pain subsided. Bond markets remained bullish and stock markets climbed to record levels.

Still, the housing market continues to flail and lenders continue to hold a death grip on their purse strings.

Sales of existing homes, which make up 85 percent of total home sales, fell 19 percent in September compared to last year, according to the National Association of Realtors. That's the slowest pace on record.

Frankly, the disconnect between the financial markets of Wall Street and the economic reality on Main Street is amazing.

So what is the real situation, and what can we expect over the next few quarters?

It is clearly in the financial interest of Wall Street to keep the "bull party" going. Strenuous efforts will be made to manipulate any positive short-term noise to keep the rally music going and the financial markets dancing!

However, it's clear, too, that the housing bust is going to last longer than expected, not to mention the plunging dollar and rising inflation.

In short, we are currently headed from contraction into recession. Although it will not become "officially" apparent until the GDP figures are published, it could be a very severe recession, even stagflation.

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Inflation will worsen as the Fed cuts rates. Although the official national inflation figures have hovered around a mere 2 percent for most of the past year, it is clear that inflation experienced by the average household is far, far higher.

Just two major components of the consumer price index (CPI), housing and autos, comprise a massive 58 percent of the inflation index and are falling in effective, "street" price.

Meanwhile, the prices of regular household items — things one really consumes every day such as food (15 percent) and heating oil (0.3 percent) — are rising rapidly in price, yet they comprise a very small part of the index.

In addition, see a plunging U.S. dollar adds to inflation, even as measured by the CPI.

It is clear that the American consumer is already cutting back on spending, taking us from contraction into recession in October. This trend will continue and the recession will deepen.

In September, the number of chain stores reporting an increase of at least 2 percent in same-store sales was cut in half in just two months, to 30 percent from 60 percent in July.

The Fed is between a rock and a hard place, to put it mildly. Although our president, Treasury Secretary and Fed Chairman talk a "strong dollar" and Congress talks tough about China "manipulating" its currency downward, the dollar has fallen.

But what can the Fed do?

If our Fed hikes its rates to defend the dollar, it risks driving the economy straight into recession.

If, on the other hand, it lowers rates, it runs the risk of a massive run on the dollar, an international monetary panic, skyrocketing inflation, and stagflation.

Even if the Fed does nothing, inflation will more than likely take off and create a stagflation effect.

If our government and the Fed have the political guts to do the right thing, the Fed will raise rates, restoring the dollar and stalling stagflation in its tracks. It will be tough on the economy and the American people, but it is the lesser of two evils.

It is a tall political order — very tall. It will require leadership of an outstanding caliber, as was shown by the late President Ronald Reagan and former Fed Chairman Paul Volcker.

Yet it's likely that the Fed will lean in favor of either doing nothing or toward further rate cuts. Either way, we are headed for very serious economic and financial times, with much shame and little pride.

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Editor's note:
Big Government Lies Exposed. Go Here Now.
Cash and Banks at Risk? Protect Your Wealth Now.
Free Report: The 5 Five Best ETFs You Can Buy Today.