1) Whenever things get rough beyond all reasonable standards. An expression of an inability to make any headway against the fundamental ridiculousness of a shitty situation.
Pioneered by Adam and Josiah about halfway through a confusing trip in Eugene, OR, it quickly became a useful, though somewhat overused, descriptor for a lot the crap that life throws at you. It also evolved into a universal adjective to directly describe people and things as well as situations. Sometimes shortened to MH.
2) Can be used as a reply to a complaint. In this form it is descriptive, but takes on the additional sense of empathizing with the speaker, while also tacitly admitting that there isn't anything that can be done about the hopelessly fucked up situ.
A: "My shoes are untied, my headphones are all tangled, I can't find my shit, my nose is running and I don't know which way is up. I feel like a bag lady."
J: "Mad haggard, yo!"
"Damn, Roland is really pissing me off with all the bullshit he's making us do. Mad haggard--i'mma quit soon."
"George Bush is mad haggard."
J: "This sucks."