I'm not an economist by any means, but this is how I'm seeing the current situation; take it FWIW.
We've been borrowing MASSIVE amounts of money from China to fund the war in Iraq. If they decide to call in the loans, and we can't pay, the dollar will crash because the world markets will have no faith in it. In addition, if we can't pay and they decide to sell their dollar holdings, they'll flood the currency market with US dollars and the dollar's value will crash.
In addition to borrowing money, the Federal govt. is also printing more money, inflating the dollar and hence reducing it's value. Inflationary pressure is an ever-present force in a fiat currency system where the government has no check against arbitrarily printing more money. This is one of the reasons why some economists and politicans (like Ron Paul) advocate the return to a system where the dollar is backed by specie, i.e. gold; if the government tries to print too much money and overly devalue the dollar, people can turn in the notes for an equivalent amount of gold. It forces the government to adhere to the will of the people; when the Fed sees the potential for a "run" on its gold stores, they stop printing more money.
As a result of all this money being printed and borrowed, the economy is naturally trying to compensate. In addition to the government borrowing from other countries, lending institutions have been lending money to people who can't afford the amounts they're borrowing. These loans are now being defaulted on, which is causing the sub-prime lender market to fall and is also causing a shortage of liqidity (available cash) in the economy, which actually deflates the currency. This was the cause for yesterday's drop in the stock markets; in fact, this liqidity shortage affected markets worldwide, not just the US market. This type of stagnation "spooks" individuals and institutions to stop investing and save their money, which actually further deflates the currency. This type of correction, however, is usually accompanied by a huge slowdown in the economy at large, causing job losses and the like.
As a response to what's going on in the sub-prime market, certain government's banks (like the Federal Reserve) are injecting some more money into the economy to keep things going.
For those interested:
http://en.wikipedia.org/wiki/Fiat_currency
http://en.wikipedia.org/wiki/Inflation