Explication
The phrase "God is dead" does not mean that Nietzsche believed in an actual God who first existed and then died in a literal sense. Rather, it conveys his view that the Christian God is no longer a credible source of absolute moral principles. Nietzsche recognizes the crisis that the death of God represents for existing moral assumptions: "When one gives up the Christian faith, one pulls the right to Christian morality out from under one's feet. This morality is by no means self-evident... By breaking one main concept out of Christianity, the faith in God, one breaks the whole: nothing necessary remains in one's hands." This is why in "The Madman", a passage which primarily addresses nontheists (especially atheists), the problem is to retain any system of values in the absence of a divine order.The death of God is a way of saying that humans are no longer able to believe in any such cosmic order since they themselves no longer recognize it. The death of God will lead, Nietzsche says, not only to the rejection of a belief of cosmic or physical order but also to a rejection of absolute values themselves — to the rejection of belief in an objective and universal moral law, binding upon all individuals. In this manner, the loss of an absolute basis for morality leads to nihilism. This nihilism is that for which Nietzsche worked to find a solution by re-evaluating the foundations of human values. This meant, to Nietzsche, looking for foundations that went deeper than Christian values. He would find a basis in the "will to power" that he described as "the essence of reality."
Nietzsche believed that the majority of people did not recognize this death out of the deepest-seated fear or angst. Therefore, when the death did begin to become widely acknowledged, people would despair and nihilism would become rampant. This is partly why Nietzsche saw Christianity as nihilistic.