First, a few of today’s headlines to set the mood:

China factory sector close to stalling – Flash PMI
Europe Services, Manufacturing Weaken More Than Forecast
France’s Manufacturing, Services Growth Slows More Than Forecast
Trichet Says Risk Signals ‘Red’ as Crisis Threatens Banks
Italian Household Confidence Falls Amid Concerns on Growth, Jobs
U.K. Retail-Sales Index Declines to Lowest in a Year, CBI Says

Deficit-Cut Talks Hit Roadblock, Cantor Exits
Jobs Picture Grows Worse as Weekly Claims Post Jump
New US Home Sales Fall 2.1 Percent in May
Fed Slashes Growth Forecast, Sees High Unemployment
Oil Prices Plunge

It’s all unfolding like a slow motion train wreck.
The underlying deflationary forces were temporarily masked when QE2, under the misconception that it was somehow inflationary, caused global portfolio managers to exit the dollar, both directly and indirectly.

But now that psychology is fading, as the global lack of aggregate demand revealing the actual spending power just isn’t there to support things at the prices managers paid to place their bets.
And the next ‘really big shoe’ (as Ed Sullivan used to say) to fall could be China, as they move into their traditionally weaker second half.

Which looks to be closely followed by the US as some kind of austerity is passed by Congress, further supported by continuing austerity in the UK and the euro zone, and the setback in Japan and much of the rest of the world from the earthquake, and not to mention Brazil and India attempting to fight inflation.

Yes, the lower crude and product prices will help the consumer, but prices were lowered in reaction to a weakening consumer, so seems more likely they will slow the decline some rather than reverse it.