1. Equities soar, but oil and gold both hit new highs and dollar hits new low on the announcement. Equity and commodity appreciation along with dollar contraction. Now just what does the Fed think that means when they say that inflation is under control?

2. The ease in liquidity does not imply that money will flow into the questionable paper that is at the foundation of the problem. Most probably it will not, other than at deep discount. Rather, it will likely flow toward the next bubble in the making, which looks to be commodities. If this materializes, it will be the last such bubble in the chain of this expansion. For increased consumer prices, along with stagnant wages will finally break the US consumer. The real problem is, of course, energy, as the rate of acceleration of demand exceeds that of supply. The global economy cannot grow faster than energy supply without driving up energy prices to unsustainable levels, just as the housing bubble has put much housing out of reach of the middle class until it inevitably corrects. Energy prices will also correct as the global economy slows down, but they will heat up as soon as things begin to straighten out. This time, however, growth will be constrained by price. The world does not have the energy resource for everyone to live the present US lifestyle, nor can the ecology of the planet stand the strain of pollution and the warming to which it is leading. Big changes are in the works, especially in energy dependent areas like the US West and suburban commuting in the major metropolitan areas as oil approaches and exceeds $100 a barrel and gas $4-5 a gallon (still cheap in comparison with Europe).

3. Owing to irresponsible fiscal and monetary policy, the rest of the world is already moving away from the dollar as its reserve currency, as the world becomes less and less US-centric. This will result in less wiggle room for the Fed and Treasury, as foreign lender demand competitive interest rates and more fiscal and monetary responsibility than is presently being shown. It will be interesting to see what Asian investors do in the coming round. The vise may already be closing.

4. Unless the fiscal structure of the US economy is addressed, either by raising taxes or cutting spending, or both, the dollar may even collapse, taking the financial markets with them. The likelihood of this happening rises with the perception that the Fed is loosing control of the situation. If this and future rate cuts do not radically alter the situation before the the first quarter when the ARM resets kick in big-time, the outlook is bleak, since there will be no more big guns to fire.

The worst case scenario is that the government could be forced to declare a debt moratorium. This would, of course, completely spook the markets, and trading would have to be suspended. This would make Black Tuesday look tame in comparison. This is probably not going to happen, but it definitely on the minds of of some people who study these things as a distinct possibility, one that is far more likely than the best case scenario of a continuing boom without inflation.

4. Etc.

I'm coming more and more to the "stagflation' scenario. Bernanke's going to be caught between a rock and a hard place - needs to ease for markets/economy; needs to raise for the dollar/inflation.

As of last week the highest price ever was $78/barrel.

Gas is cheap but not for long. Without any kind of short term emergency you'll probably be seeing $4/gallon gas soon at a store near you.

At it will go up from there.

How long will people believe they are better off just because an imaginary number at the stock market goes up after the Fed prints more cash and makes credit easier to come by?

I did inhale.

This is a very large reflation and your suggestion that it will ignite further commodity price surges is probably correct. If this occurs fairly quickly - and the new high in oil seems to suggest that is going to happen - then the market hasn't much choice but to adopt your analysis and comprehend exactly what dilemma the Fed is in. The Fed's dilemma is of course the global economy's dilemma, and other central banks may not be too happy with the outcome of this Fed rate cut.

So far, we are on the cusp of these problems. At this point, and for the past five years, the U.S. has been given a free pass to reflate and extend its indebtedness. The dollar has leisurely shifted down without a panic, no one is aggressively dumping Treasuries (on the contrary, there always seem to be buyers for what we might as well call our Iraq bonds), and the U.S. consumer seems apathetic or ignorant about the deteriorating financial conditions and long term economic problems. Politicians and the Fed have paid no penalty whatever for these policies. When will that change? That is the key question.