That doesn’t leave members of the central bank’s policymaking Federal Open Market Committee (FOMC) much room to maneuver. Still, the policymakers may have more ammunition in their arsenal and the statement that accompanies the rate decision at the end of the two-day session could shed some insight on the “creative” actions the Fed could consider in addition to rate cuts (For instance, the central bank could extend the new investment firm discount window, offer additional loan guarantees, or utilize any number of other tools).

And the Fed may well have to use those other tools. As Japan’s “Lost Decade” demonstrated, “zero” interest rates won’t necessarily jump-start an economy – especially when interest rates weren’t really the problem. And as several Money Morning investigative pieces have demonstrated, the low interest rates aren’t necessarily inducing banks to lend. Indeed, many banks are using the federal bailout money to finance buyout deals.

The ministers of the Organization of the Petroleum Exporting Countries (OPEC) will meet in Algeria on Wednesday and President Chakib Khelil implied that a surprisingly sizable production cut is in the cards.  While OPEC controls about 40% of the world’s oil supplies, energy analysts hold more stock in actions rather than words. Said one of those analysts: “You can announce all the cuts you want. Compliance is the key.”

Market Matters

In a major story last week, Bank of America Corp. (BAC) may be eliminating 35,000 jobs as it adds Merrill Lynch & Co. Inc. (MER) to its ever-growing list of subsidiary companies.

But in an even bigger story, Wall Street powerbroker, Bernard Madoff stole the headlines (and about $50 billion from investors in the process).  This former chairman of the Nasdaq Stock Market Inc. (NDAQ) ASDAQ was arrested for committing perhaps the largest investor fraud in history (Enron may be off the hook) as Bernard L Madoff Investment Securities LLC appears to have been “basically a giant Ponzi scheme” (his own words).  Though the client list seemed relatively small, at first, the implications will be quite widespread, as some of the largest hedge funds of funds participated in Madoff’s investments; their clients include some of the world’s (formerly) wealthiest folks.  Additionally, regulators will have quite a few questions to answer as lax oversight failed to uncover this massive fraud that may have been perpetrated for years.  Stay tuned – this one isn’t going away any time soon.

In “lighter” news, the U.S. House of Representative passed a “preliminary” auto bailout package that would provide $14 billion to the Big Three – Ford Motor Co. (F) may not need any for now – and create a new car czar to oversee an industry restructuring.  While Wall Street initially hailed the move as a positive step to a necessary overhaul, the Senate demanded greater concessions from auto unions and the bill became basically “dead on arrival.”  Since the U.S. Treasury Department appears to be growing more comfortable with the bailout concept with each passing day, Bush administration officials implied that aid via the $700 billion Troubled Assets Relief Program (TARP) would be forthcoming even without Senate approval. By the way, an oversight committee gave the financial bailout a rather poor initial report card, claiming a lack of transparency in terms of how dollars are being spent and whether recipients are complying with government intentions (no wonder the automakers want to participate as well).

Elsewhere, Merrill’s John A. Thain reversed an earlier position by “choosing” to forgo his 2008 bonus and Morgan Stanley’s (MS) John J. Mack quickly followed suit.  The Dow Chemical Co. (DOW), Sony Corp. (ADR: SNE), and 3M Corp. (MMM) joined BofA and others in announcing sizable job cuts.  FedEx Corp. (FDX) and The Procter & Gamble Co. (PG) reduced prior outlooks and sales projections.

Oil prices fluctuated greatly as traders weighed contrasting supply/demand reports:

• The Energy Information Administration expects weak demand to result in declining consumption through 2009 even as significant production cuts could be announced at the upcoming OPEC meeting.
• With oil trading below $47 a barrel, Goldman Sachs Group Inc. (GS) (of “we’re going to $200/barrel fame”) contradicted past forecasts by claiming prices could fall to $30 (and lost some credibility in the process).

Stocks reacted favorably to rumors of President-elect Barack Obama’s $500+ billion stimulus package (see below) and the apparent progress with automaker negotiations.  As the week moved on, reports of new job losses and more financial woes halted the brief optimism and the Senate’s inability to pass an auto bill brought more excessive volatility.  A “flight-to-quality” sentiment contributed to yields on 3-month T-bills dipping to 0.0% (that’s ZERO percent … talk about risk averse).

Economically Speaking

“I am absolutely confident that if we take the right steps over the coming months, that not only can we get the economy back on track, but we can emerge leaner, meaner and ultimately more competitive and more prosperous.”

Somehow an economic stimulus plan which directs $500+ billion into new FDR-like public works programs to increase employment does not necessarily imply “leaner and meaner.”  Still, many analysts believe the Obama plan (still in its infancy) may be just the tonic needed to jumpstart the economy.

Meanwhile, the European Union announced its own $200 billion package as the 27 member countries struggle with global recession.  Not to be outdone, Japan revealed some sizable stimulus measures of its own late in the week.  With the recession already pushing a year in duration, Duke University released results of its Global Business Outlook Survey which showed that 60% of domestic CFOs believe the downturn will last until the 4th quarter of next year – and perhaps longer. Similarly, a
Wall Street Journal forecasting survey predicted four straight quarters of negative growth as measured by gross domestic product, or GDP, the longest period of economic contraction since the Great Depression.

A light week on the economic calendar ended with a couple of major reports that gave the Fed a bit more anecdotal material to (over-)analyze prior to the FOMC meeting today and tomorrow. With claims for unemployment benefits soaring to their highest level since November 1982, Federal Reserve Chairman Ben S. Bernanke and friends must make job creation among their top priorities.  November retail sales fell by 1.8% as automakers reported their worst level of monthly activity in 26 years.

Still, the decline was less than Wall Street expected, leading Morgan Stanley’s analysts to speculate about future downward revisions.  Wholesale inflation (as measured by the producer price index, or PPI) declined by 2.2% as gasoline prices plummeted by 25% in November.  Normally, consumers would welcome such news and gladly spend those savings from the pumps at the malls during the holidays.  Instead economists continue to spread more “gloom and doom” by suggesting consumers may hoard their savings and resist spending amid these uncertain times.

Weekly Economic Calendar

Source: Fed May Cut Rates Again as Policymakers Meet

“As the post-Memorial Day hangover lingers, and $4 per gallon gasoline becomes a national reality, expect more and more daily energy prognostications,” says William Patalon III in Money Morning.

“Goldman Sachs Group Inc. (GS) already is on record for $200-a-barrel oil. As you all know, our own Keith Fitz-Gerald has projected a crude-oil price of $225 a barrel. Do I hear $250? What about $5 a gallon gasoline by July 4th?

“Sometimes, these daily price gyrations take on lives of their own, but at the end of the day, the basic laws of supply and demand always work themselves out.”

There’s a new oil rush going on in Alberta, Canada, says Alex Green in InvestmentU: “Alberta’s oil sands are the largest known reserve of oil on earth containing between 1.7 and 2.5 trillion barrels.”

“For decades, these sands weren’t even considered part of the world’s oil reserves because the oil there wasn’t economically extractable at prevailing prices using then-current technology. But times have changed… And the new gold rush is on.

“Here’s the kicker: Exploration of Alberta’s oil sands is virtually risk-free. You can’t drill a dry hole here. There’s no drilling at all. It’s a mining operation – and the reserves are thoroughly outlined. So what you really need is a company with plenty of machinery, money and manpower to dig it up and process it as quickly as possible.”

Read on here to find out the one undisputed blue-chip play on Alberta’s oil sands.

“We’re seeing the bout of profit-taking that everyone has been waiting on,” said Neal Ryan, manager at Ryan Oil & Gas Partners, after crude concluded a 4-day run that had taken it up by 7%.

“Just looking at the volatile price action today, it’s pretty evident that the market is being driven up and down by the traders waiting on some news to hit the tape,” Ryan added.

Meanwhile, the International Energy Agency is getting ready to issue a sharp downward revision of its oil-supply forecast, according to a Wall Street Journal report. The IEA is assessing the condition of the world’s top 400 oil fields, and will reportedly say in November that future crude supplies could be far tighter than previously thought.

And, in one of the more bonehead political moves of late, the House of Representatives approved legislation, by a veto-proof majority, allowing the Justice Department to sue OPEC members for limiting oil supplies and working together to set crude prices. The bill would attempt to subject OPEC oil producers, including Saudi Arabia, Iran and Venezuela, to the same antitrust laws that U.S. companies must follow.

Getting it right for once, the White House opposes the measure, saying that targeting OPEC investment in the United States as a source for damage awards “would likely spur retaliatory action against American interests in those countries and lead to a reduction in oil available to U.S. refiners.” $200 oil anyone?

Source: Crude Finally Pulls Back

The end of yesterday’s trading marked the expiration of the June crude contract, which may have contributed a bit of extra volatility to the day’s action.

Traders were also apparently moved by comments from legendary Texas oilman T. Boone Pickens, who predicted that crude would reach $150/barrel by year’s end.

Speculators, Pickens said, have “nothing” to do with record prices, citing instead the reality that said world oil supplies are declining and output is not keeping pace with demand.

Source: No End in Sight for Crude

Eight bombs are set off in Jaipur in a terrorist attack that reminds us of the dangers we face every day. “There is no reason to panic”, a senior city official is quoted as saying, “everything is under control”.

Oil was USD 26 a barrel when the US vowed to go into Iraq and secure oil supplies. It is now trading at USD 126 a barrel.

And while the price of oil is soaring, the Indian government continues to fool around with what the price of oil should be to the end consumers.

And how much of the “oil subsidy burden” must be shared between the government, the oil producing companies, the oil refinery companies, and the oil marketing companies.

And they change the formula when they want – for any reason. So now the focus is on changing the name of Bombay to Mumbai – everywhere. Bombay Stock Exchange will be Mumbai Stock Exchange. Bombay Dyeing will be Mumbai Dyeing.

Meanwhile the local trains will still kill some 3,500 people every year. The total number of deaths due to terrorist attacks all over India is estimated at 2,500 every year. A normal 9-bogey train is supposed to carry 1,700 people but – at peak times – there are 4,500 people at any time. But how to make Bombay a better place to live does not occupy that much time for our leaders. A name change must be the correct answer.

Presidential candidate Obama may end up being the candidate for the Democratic Party but he cannot win the votes from people who are white, not educated, and earn less than USD 30,000 a year. That sounds like a lot of people. This mass of people has said that, if Obama is the candidate, they will vote for the other side – the Republicans. Meanwhile, Presidential candidate Clinton cannot win votes from the blacks in America and from those who are educated. The “melting pot” that was America is at risk: it looks more like a “thali” now. Rich food is served in silver bowls and the other food in plastic cups.

On Tuesday, May 13th the Indian stock markets opened strong but, by the end of the day, they closed in negative territory. On Wednesday, May 14th it was the reverse – the markets opened weak and closed strong. We don’t know what it will do tomorrow. Or next week. Or next month.

In fact, we don’t know what the “news” will highlight tomorrow. All that we read is actually “olds”, not news. The actions of the past have set in motion a series of events that will crop up at random times but with predictable results.

When India drifted towards Asia millions of years ago, an earthquake in China was a guarantee. The timing was uncertain.

When a government steals land from the poor to give it to the rich, naxalites are born. When a government uses religion to win votes and determine policy, terrorists are born. Yesterday’s citizens are today’s terrorists – disenfranchised from the mainstream. Creating earthquakes they hurt innocent bystanders in a shameful way.

When India fumbled on what to do when oil prices rose from USD 26 to USD 50, it was a given that it would fumble even more when oil is at USD 126.

When the US became a country of the rich, for the rich, and by the rich the split votes of the elite v/s the blue collar were a given.

When India opened the doors to foreign punters under the P Note policy, it invited earthquakes, terrorist attacks, and plain stupidity to play a part in funding the country’s long term economic development. Every day about USD 2 billion worth of shares are bought and sold by FIIs. At the end of the day the net flow into India is sometimes plus USD 40 million, or sometimes negative USD 40 million, at an average.

So these P Note folks trade USD 2 billion and then end up buying or selling, on a net basis, about 2% of that total.

So 98% of their trades are “noise”. They make the brokers rich for sure, but what do they do to India’s long term standing in the global capital markets?

India is a joke amongst the long term investors. India has taken a massive “tenure” risk: we have taken capital from short term folks to fund our long term plans. And everyone is carrying on with policy making in complete bliss. But somewhere in this mess, somewhere in this drift, we need to find our anchors.

We need to look for answers that make sense. Changing the name of the Bombay Stock Exchange to Mumbai Casino or the National Stock Exchange to Bharat Casino may be a good start.

At least then we will know who we really are and then try to work out what we want to become.

Source: Adrift

Accompanied by that reassuring bit of alleged “certainty,” gasoline at $4 a gallon doesn’t sound quite so scary. In other words, we know that gas prices are headed higher, but we also know that there’s a limit, and we know exactly what that limit is.

Early last week, the U.S. Department of Energy said that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since that high price will serve to curb demand and keep prices in check.[although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level].
With crude oil having spiked above the $112 a barrel level last week on reports of declining oil supplies, grandstanding politicos on both sides of the aisle took the opportunity to bash each other’s energy policies [Don’t tell me … it must be an election year]. Seeming to add credibility to the Energy Department’s prognostication was last week’s weekly inventory report that showed that demand is waning – ostensibly because record gas prices now stand more than 55 cents a gallon higher than they were at this time last year.

But here’s the problem.

The Energy Department is wrong.

Indeed, the federal agency is just the latest “expert” to make erroneous forecasts for energy prices. Thankfully, that’s not true of Money Morning.

Since its inception last year, Money Morning has repeatedly predicted incrementally higher prices for crude oil and gasoline. Invariably, these predictions have proved themselves correct. And we’ve done more than just make predictions: We’ve also outlined investment opportunities that would allow investors to capitalize on this advance in energy prices.

In December, for the first time ever, Money Morning Investment Director Keith Fitz-Gerald publicly predicted that oil prices would reach $187 a barrel within three years. In mid-March, he reiterated this projection [accompanied by several suggested ways for investors to profit from this powerful trend]. Not only has this forecast continued to receive widespread play on energy- and investment-related Web sites, we’re starting to see similar “me too” predictions being made by some the energy sector’s heavyweight experts: Literally only days after Money Morning reiterated its forecast, Wall Street giant Goldman Sachs Group Inc. (GS) said that crude oil prices would reach $175 a barrel in the next two years.

This underscores one of the key mandates for Money Morning. While it’s true that we’re the hottest global-investing news service in the market today, this case study demonstrates that we’re more than just a purveyor of news. Our role is to provide our regular readers and subscribers with the news, of course, but it’s more important for us to explain just what the news actually means. To that end, look for us to:

• Put the news in context.
• To describe how the issue at hand fits in with the handful of powerful global trends that we’ve ferreted out and identified as the top ones that you need to follow if you’re to succeed and profit.
• To stay ahead of the crowd by projecting the “end game” – the outcome – for these top trends.
• And, finally, to research and highlight investment opportunities that are the best-positioned to benefit from these trends, meaning these represent some of the best profit opportunities in the market today [Editor’s Note: If this investing strategy appeals to you, it’s well-worth checking out our affiliated monthly newsletter that maintains several portfolios of stocks and funds chosen using these guidelines. New subscribers get a free copy of investment guru Jim Rogers’ new best-seller, "A Bull in China."]

Stay tuned: We’ll continue to follow the oil-and-gasoline saga as it unfolds, and we’ll continue to find ways for investors to profit from this and other top global trends.

Last Week’s Market Action

If you’re of a certain age, surely you remember some of the marketing “slogans” airlines used to burnish their brand names and, hopefully, to attract passengers. attract passengers.

After all, whatever happened to: “We Earn our Wings Everyday,” or “Fly the Friendly Skies,” or even “Something Special in the Air?”

Last week, however, the more appropriate taglines may have well have been: “We No Longer Overlook Safety,” or “Enjoy Your Stay in the Updated Airport Concourse,” or even better “When the FAA Talks, We Now Listen.”

As if the escalating gasoline prices have not caused enough hardships for the airlines, in recent weeks, they seemed to realize that they actually are required to abide by government safety regulations. Just last week, American Airlines Inc. (AMR) canceled more than 3,000 flights, thus, inconveniencing an estimated 250,000 travelers because a little faulty wiring “may” cause fires in certain aircraft. While some analysts were astonished at the lapse in judgment exercised by AMR’s airline management, others believed this to be classic bureaucratic overreaction due to previous lax oversight. In any case, the airlines undoubtedly will see their future earnings suffer and ticketed customers will experience extended delays [forcing them to seek out the closest Chili’s Bar & Grill inside the airline terminal - at least perhaps representing a boon for the earnings for that company].

Meanwhile, the world’s demand for oil keeps rising as more people around the globe – especially in emerging giants like India and China – set up factories, buy cars, take flights, heat their homes, and pound the table for “more juice.”

Then there are political question marks. Iraq is a mess. Russia is inclined to use its resource exports as a carrot or a stick, depending on the mood. And Nigeria is a special basket case.

Last week, for instance, an escalation in attacks by militants in the Niger Delta sent oil to a record close. Exxon has said the situation is so bad that its production is now closed and it is unable to meet its contractual obligations.

Royal Dutch and other Western oil companies there have the same problem. Not good. Nigeria is Africa’s largest producer and the world’s eleventh biggest.

No wonder oil is trading near $120 a barrel.

This is the back story. But it’s important to understand that it is only that, a story. It doesn’t tell us where oil should be trading. Ultimately, that will be decided by supply and demand, not by this week’s headlines or short-term speculation.

A lot of smart people are beginning to believe this bull market will die hard. Whether you agree or not, it’s worth listening to their side.

According to Michael Lynch, President of Strategic Energy & Economic
Research, oil has now become “the mother of all bubbles.” He has a few pertinent facts on his side.

The U.S. is the world’s largest oil consumer. Yet our economy is in a slump. Despite the sharp rise in oil prices this year, oil demand in the U.S. is actually down 2% so far.

According to the federal Energy Information Administration, high prices and a weak economy will knock down U.S. oil consumption by 90,000 barrels a day this year.

The situation is similar in many other parts of the world. The International Energy Agency (IEA), the Paris-based energy watchdog of the world’s richest nations, just lowered its forecast for world oil demand growth by 460,000 barrels a day. The IEA also sees supply from outside OPEC growing by 815,000 barrels a day, the strongest growth since 2004.

According to Mr. Lynch, “The run-up in price we’re seeing in the last six weeks or so has happened while the fundamentals have, generally speaking, gotten bearish.”

Tim Evans, an energy analyst at Citigroup in New York, agrees. He says the oil bubble is “still expanding” and insists “there is no supply-demand” deficit.

So far the futures market has shrugged off these arguments. Oil is up roughly 25% this year and prices have almost doubled since the start of 2007.

And who can say? Maybe oil will trend higher. Perhaps much higher, especially if we see a major supply disruption.

But high prices always sow the seeds of their own collapse. Consumers will start to conserve. Producers will search for oil that was once too costly to extract. Supply and demand will come back into balance.

Right now the bulls are having their way. But it would be foolish to believe there are no red flags on the horizon. Chief among these is that you keep hearing “the story.”

You know the stories. “The internet changes everything.” “They’re not making any more real estate.” “Oil has nowhere to go but up.”

We’ll see.
Good Investing,

Alex

Early last week, the U.S. Department of Energy said that it expects average monthly gasoline prices to peak at $3.60 a gallon this spring, since that high price will serve to curb demand and keep prices in check.[although even the Energy Department report said that before prices level off there could be interim price spikes that will take pump prices up over the $4 a gallon level].

With crude oil having spiked above the $112 a barrel level last week on reports of declining oil supplies, grandstanding politicos on both sides of the aisle took the opportunity to bash each other’s energy policies [Don’t tell me … it must be an election year]. Seeming to add credibility to the Energy Department’s prognostication was last week’s weekly inventory report that showed that demand is waning – ostensibly because record gas prices now stand more than 55 cents a gallon higher than they were at this time last year.

But here’s the problem. The Energy Department is wrong. Thankfully, that’s not true of Money Morning. Since its inception last year, Money Morning has repeatedly predicted incrementally higher prices for crude oil and gasoline. Invariably, these predictions have proved themselves correct. And we’ve done more than just make predictions: We’ve also outlined investment opportunities that would allow investors to capitalize on this advance in energy prices.

In December, for the first time ever, Money Morning Investment Director Keith Fitz-Gerald publicly predicted that oil prices would reach $187 a barrel within three years. In mid-March, he reiterated this projection [accompanied by several suggested ways for investors to profit from this powerful trend]. Not only has this forecast continued to receive widespread play on energy- and investment-related Web sites, we’re starting to see similar “me too” predictions being made by some the energy sector’s heavyweight experts: Literally only days after Money Morning reiterated its forecast, Wall Street giant Goldman Sachs Group Inc. (GS) said that crude oil prices would reach $175 a barrel in the next two years.

This underscores one of the key mandates for Money Morning. While it’s true that we’re the hottest global-investing news service in the market today, this case study demonstrates that we’re more than just a purveyor of news. Our role is to provide our regular readers and subscribers with the news, of course, but it’s more important for us to explain just what the news actually means. To that end, look for us to:

• Put the news in context.
• To describe how the issue at hand fits in with the handful of powerful global trends that we’ve ferreted out and identified as the top ones that you need to follow if you’re to succeed and profit.
• To stay ahead of the crowd by projecting the “end game” – the outcome – for these top trends.
• And, finally, to research and highlight investment opportunities that are the best-positioned to benefit from these trends, meaning these represent some of the best profit opportunities in the market today [Editor’s Note: If this investing strategy appeals to you, it’s well-worth checking out our affiliated monthly newsletter that maintains several portfolios of stocks and funds chosen using these guidelines. New subscribers get a free copy of investment guru Jim Rogers’ new best-seller, "A Bull in China."]

Stay tuned: We’ll continue to follow the oil-and-gasoline saga as it unfolds, and we’ll continue to find ways for investors to profit from this and other top global trends.

Last Week’s Market Action

If you’re of a certain age, surely you remember some of the marketing “slogans” airlines used to burnish their brand names and, hopefully, to attract passengers. attract passengers.

After all, whatever happened to: “We Earn our Wings Everyday,” or “Fly the Friendly Skies,” or even “Something Special in the Air?”

Last week, however, the more appropriate taglines may have well have been: “We No Longer Overlook Safety,” or “Enjoy Your Stay in the Updated Airport Concourse,” or even better “When the FAA Talks, We Now Listen.”

As if the escalating gasoline prices have not caused enough hardships for the airlines, in recent weeks, they seemed to realize that they actually are required to abide by government safety regulations. Just last week, American Airlines Inc. (AMR) canceled more than 3,000 flights, thus, inconveniencing an estimated 250,000 travelers because a little faulty wiring “may” cause fires in certain aircraft. While some analysts were astonished at the lapse in judgment exercised by AMR’s airline management, others believed this to be classic bureaucratic overreaction due to previous lax oversight. In any case, the airlines undoubtedly will see their future earnings suffer and ticketed customers will experience extended delays [forcing them to seek out the closest Chili’s Bar & Grill inside the airline terminal - at least perhaps representing a boon for the earnings for that company].

— The Energy Information Administration’s weekly inventory report this morning shows oil supplies fell 3.2 million barrels over the last week — a far cry from analysts’ estimates of a 2.5 million barrel increase. Within minutes, light sweet crude shot past $111. If it closes above $110.13, we’ll have a new record high today.

Get used to it, says the EIA. Hours before the inventory report, the EIA raised its average oil price forecast for the year from $87 back in January to $101…with or without a recession in the U.S.

— “Consumers are beginning to shrink,” admitted our friend Alan Greenspan on CNBC yesterday, continuing his Rep Rehab tour, “the automobile markets are beginning to contract, production is beginning to ease and we are in the throes of recession.”

Over the weekend, he said he didn’t think the U.S. was in recession yet. But we hesitate to accuse the former Fed chair of misspeaking. In his mind, the “throes” of a recession may well be something different from an actual recession.

— The International Monetary Fund (IMF), for its part, expects a “mild recession” in the U.S. this year. It put a price tag of $945 billion on losses from the credit crisis this morning. That would mean — with only $232 billion in write-downs behind us — we’re barely a quarter of the way there.

“There has been a collective failure,” says the IMF’s director of monetary and capital markets, Jaime Caruana, “to appreciate the extent of leverage in the financial system and the associated risks of disorderly unwinding.”

— Minutes from the Federal Reserve’s Open Market Committee meeting last month released this week reveal the Fedheads are only mildly freaked by their situation. “Many participants,” the minutes say, “thought some contraction in economic activity in the first half of 2008 now appeared likely.” Some fretted about “a prolonged and severe economic downturn.”

If you’re keeping score at home, the FOMC meets again April 29-30. In Chicago, traders have priced in a 100% chance of another 25-basis-point cut, with 44% odds of a 50-point cut.

— Meanwhile, quants behind the scenes are desperately trying to engineer new ways to increase liquidity…without dropping the fed funds rate.

The Fed’s Term Auction Facility (TAF), offering 28-day loans to commercial banks, spat out another $50 billion yesterday, for a total of $310 billion since last December. But they need more, more, more…

“The likeliest option…is for the Treasury to issue more debt than it needs to fund government operations,” surmises Greg Ip at The Wall Street Journal this morning. “The extra cash would be left on deposit at the Fed, where it would be separate from bank reserves on deposit, and thus would have no impact on interest rates. The Fed would use the cash to purchase an offsetting amount of Treasuries in the open market; for legal reasons, it generally cannot buy them directly from Treasury.”

“There are good reasons for legal limits on the Fed directly purchasing Treasuries,” comments our Dan Amoss, appalled at the Fed’s gumption. “Doing so basically means the Fed would print dollars to pay for the federal budget deficit — a move that would quickly lead to a total loss of confidence in paper money. History shows that when central banks start directly monetizing government deficits, confidence in paper money collapses quickly.

“The idea to expand the supply of Treasuries is also bad. This would put more purchasing power into the hands of a wasteful federal government. Since the government doesn’t produce any goods or services to offset its buying power, this idea would also add pressure to consumer prices.

“In short, there are no easy answers to a problem created by easy money and runaway credit growth. Expanding the money supply — no matter how sneakily — will only hurt confidence in the dollar.”

— “The U.S. has no way of avoiding a financial Armageddon,” says our friend the always chipper John Williams, expecting something much more ominous than a mild recession.

“Bankrupt sovereign states most commonly use the currency printing press as a solution to not having enough money to their obligations. The alternative would be for the U.S. to renege on its existing debt and obligations — a solution rarely seen outside of governments overthrown in revolution…”

At the current pace, “Hyperinflation could be experienced as early as 2010, if not before, and likely no more than a decade down the road. The U.S. government and Federal Reserve already have committed the system to this course through the easy politics of a bottomless pocketbook, the servicing of big-moneyed special interests and gross mismanagement.

“While the dollar has taken a heavy hit — down roughly 20% against key currencies from last year — selling of the U.S. currency still has been far short of the outright dollar dumping that eventually will lead to flight to safety outside of the U.S. dollar.”

— “You don’t have to predict it,” Paul Volcker replied yesterday to a question about the coming dollar crisis at the Economic Club of New York. “We’re in it.”

We’ve met the former Fed chairman several times. Once at a Grant’s conference at the Regis Hotel in New York a few years ago. And then again a few months ago when he granted us an interview for I.O.U.S.A. At the time, he warned Ben Bernanke not to let inflationary pressures build in the economy because once they start…they’re very hard to stop. Volcker earned his reputation the hard way fighting the inflation by forcing interest rates to heights this economy would suffocate under.

Yesterday, he said he’s experiencing flashbacks. Citing the rising price for soybeans and oil as two indications we’re “at a point when we have to worry” about inflation, he went on to warn today’s Fed not to favor special interests and “subordinate the fundamental need to maintain a reliable currency” in order to steer clear of recession at all costs.

“The Fed has a particular duty to defend the integrity of the ‘fiat currency’ in its charge,” the WSJ paraphrases Mr. Volcker. “And exchanging dollars for ‘mortgage-backed securities of questionable pedigree’ both raises the specter of moral hazard and potentially undermines the world’s faith in the integrity of the Fed’s balance sheet.”

In other words, look out below.

We told you yesterday our fully updated and revised edition of Demise of the Dollar is on Amazon yesterday. Unfortunately, we gave you the wrong link. Try this one instead. And if you’re in the Philadelphia area, there is a screening of I.O.U.S.A. tonight at 5:00 p.m. at the Philadelphia film festival.