It's becoming clear that the Fed's liquidity injection isn't going to cut it.

Yesterday's Financial Times (FT) headline read, "Fed fails to calm money markets."

Its subheads read, "Flight to safety hits Treasury bill yields" and "Speculation on further interest rate cuts."

A Wall Street Journal (WSJ) headline said, "Fed Fails So Far in Bid to Reassure Anxious Investors."

As our readers know, we have long stated and often quoted Stephen Roach (former chief economist of Morgan Stanley) that the world has been awash in liquidity. Last year, he said, "…liquidity remains more than ample to support ever-frothy markets…. For my money, the risks of a global fizzle are being taken too lightly."

Story Continues Below

Financial Intelligence Report gives subscribers 12 ways to protect their investments from the liquidity crunch that is wreaking havoc on the stock markets. Go here now. It's not too late to act.

We have also pointed out that the world was not just awash in liquidity, but liquidity so cheap that, at 5.25 percent (Fed Rate), it was available at some 0.75 percent BELOW the "real" (calculated on a pre-Clinton basis) 6 percent rate of inflation. The prime banks then leveraged it up to lend, often to hedge funds, which could leverage themselves up to 54 times, in the derivative markets.

When our government actually pays (0.75 percent) banks for borrowing, the recent bank lending spree becomes a little more understandable.

Based upon what we call the "Great Inflation Lie", our government has sponsored a lending spree and the aggressive greed and imprudence that have fueled the recent asset boom.

Worse still, much of the so-called "investment" has been done though the derivatives market.

Commentators say that this market is some $500 trillion (yes, trillion) in size, or many times the pooled central bank reserves and even gross domestic products of the major nations! Talk about big and unwieldy, let alone uncontrollable.

Most worrying is the fact that, many in the top management of major investing institutions are largely unaware of who is left holding the "baby" in certain derivatives. Many investors do not know what they own in terms of ultimate risk.

In our view, the present financial scandal amounts to government-sponsored "pyramiding," a moral hazard that is illegal for individuals.

It is interesting to see how our politicians are now running from involvement, even to the extent of studiously avoiding offering advice to the Fed.

At the same time our politicians' talk menacingly of retrospective legislation against bank lenders in this government-sponsored pyramid scheme. Talk about running away from responsibility!

We are now witnessing the unwinding of a series of gigantically leveraged and highly speculative investments, all keyed to economic growth.

In our view, the biggest problem is that this is happening just as the great American consumer, hit by "real" or stealth inflation (food, gas, health and service cost increases) is cutting down on expenditure.

We have long warned our readers of this and are now seeing growing evidence that our economy is about to move into recession. In fact, FIR has positioned it's portfolio to guard investors against recession while still aiming for profits. Go here now to find out which investment FIR thinks is the ultimate insurance against the impending recession.

Today, we are not alone in this view.

The historically low price of our dollar indicates that the world outside has great concerns about our economy.

In addition, as the FT and WSJ headlines report, our banks are "shell shocked."

They are increasingly unwilling to lend or to invest in anything but the most secure securities.

Indeed, it appears that the banks are using their abundant liquidity to invest in the Treasury bills searching for safety and to speculate on a near-term Fed rate cut.

So, we ask, if the banks won't lend, what on earth is the point of merely pumping in massive amounts of liquidity - the very medicine that caused the financial ill we are now witnessing?

To us, the Fed is pushing on a string and it will not work.

Under the present Fed policy, the cost of credit is rising and availability is shrinking: just as it did, for exactly the same reasons, in 1929.

Any continued delay, on the part of our Fed, is allowing our financial illness to worsen, making the ultimate financial bloodbath unnecessarily severe.

In this respect, the action - or rather lack of action - of the Bank of England is of particular interest.

The Bank of England, or the "Old Lady of Threadneedle Street", as she is affectionately known, is the oldest central bank in the world.

London is also home to the vast, worldwide Eurodollar (U.S. dollars in the hands of non-U.S. residents) market; to the largest foreign exchange; and to the largest international commodity, bond, and stock markets in the world.

So, the "old Lady's" actions should be of particular interest to any serious observer.

Remarkably, few media or Wall Street observers appear to have noticed this "strange" inaction by the "Old Lady". Is she the only one in step as the world's other central bankers march in lock-step toward financial chaos?

Furthermore, those few commentators who have noticed have speculated that the unwillingness of the Bank of England to pump liquidity into the largest international financial markets in the world is to avoid creating a sense of panic.

We disagree.

We are tempted to believe the Bank of England agrees with us, that excessive liquidity is the "cause" of the problem NOT the "remedy".

We suspect that the Bank of England is privately urging our Fed to lower the Fed rate, before the debt laden, stealth-inflation battered, politically-misled American consumer stops spending, starts hoarding and drives our economy and possibly drags the world economy with it into a recession, the depth of which we shudder to contemplate.

We repeat our call to the Fed to cut rates, in order to put much needed liquidity, not into the hands of the banks who are too scared to lend, but into the hands of our increasingly hard-pressed, mortgage-owning consumers and small businesses-the pillars of our economic health and growth.

Of course, a cut in rates will be inflationary, bad for the U.S. dollar, long-term bond rates, and may tend to let some "bandits" off the hook.

However, we feel the survival of our growth economy and the avoidance of a depression must take absolute top priority, and the Fed should act immediately in the greater good.

We believe that the longer the Fed remains fearful and frozen at the switch, the worse will be the collapse and the lower interest rates will have to go, for longer, in order to tempt the American consumer back onto Main Street.

In the meantime, we urge our readers to pay due heed to the great seriousness of the situation we all face and not to get suckered into stock market rallies based upon political and financial cheerleading, where the latter-day cry is that, "the fundamentals are sound." Tell that to the Marines!

The price of the U.S. dollar should shout loud and clear to our readers that our economic fundamentals are decidedly "unsound".

We feel that in the coming market downturn, the good will be dragged down in the wake of the bad. This will represent great future buying opportunities for those with cash or gold, but not yet!

We believe that, regardless of price, no stock is "cheap" when it is headed downwards. The only cheap stocks are those that are about to rise in price!

For a list of FIR's 99 stocks to dump now and 10 stocks to buy, Go here now.

Editor's note:
Big Government Lies Exposed. Go Here Now.
Will the Liquidity Crisis Sink Your Stocks? 12 Ways to Profit.
Protect Your Investments From the Coming Housing Disaster