Out comes the kitchen sink.

The actions of this last week will go down in history as the end of the US as an economic superpower. I realize that’s a harsh view to take. And I love this country dearly. But the writing is now on the wall. The regulators—SEC, Treasury, Federal Reserve, and President Bush—have officially bankrupted this country, destroyed the dollar and guaranteed that our quality of life will be on the downward slope for the next decade.

I’ve already commented at length on the Fannie/ Freddie deal. In a nutshell that intervention added $5 trillion—at least $1.2 trillion of which is garbage—in liabilities to the US balance sheet. And it:

• Didn’t solve the housing crisis—housing starts fell 6.2% in August (a 17-year low) while building permits fell 8.9%.
• Won’t boost the homebuilder industry—you can’t sell homes if banks are lending.
• Sure as heck didn’t save the stock market: all we got was a feeble one day rally.

However, this latest intervention—one that required Congress to expand the statutory limit on the national debt to $11.3 trillion—is the kiss of death. The benefits to US taxpayers to this deal are even fewer than those of the Fannie/Freddie deal. The Feds have now thrown everything they’ve got, including the kitchen sink, at the market. How the markets react remains to be seen.

As for the commentators going ballistic and saying this move is “unprecedented,” they’re wrong. The government has attempted to solve financial crises before by creating a separate fund or trust to buy crummy assets. The last time they did this was with the Resolution Trust Corporation (RTC) during the Savings & Loan crisis in the early 1990s.

The RTC, like today’s superfund, was a separate entity meant to take over insolvent banks and then sell off their assets—both good and bad. However, the key difference between the RTC and the government’s proposed superfund is that that the RTC primary dealt with real estate holdings? real assets that are relatively easy to value? while today’s superfund will deal with mortgage backed securities or debt?intangibles or paper that are impossible to value.

When you buy real estate, the asset changes hands at a price and the deal is closed. Buying derivatives from someone entails a shift in risk, but for many securities, the deal is not closed until the derivative expires or is triggered. Thus, the Feds are lining up several hundred billion dollars worth of open-ended liabilities.

Until the deal is announced and all the details worked out, it’ll be difficult to gauge its impact. But one thing is for certain:

It will be highly pro-inflationary.

Commodities have been slammed in the last two months due to the dollar rally. But we are now nearing a time of hyperinflation when the Feds paper over any and all problems with reckless abandon. As the market comes to realize this, commodities and other inflationary hedges will begin their bull market anew.

Be prepared to pull the trigger.

Last 5 posts by Graham Summers

• We're Soooooooo Close! - October 9th, 2009
• Kiss the “New Bull Market” Theory Good-bye - October 8th, 2009
• The One Investment That Might Be About to Bottom - September 30th, 2009
• What the Fed Doesn’t Want You To Know About US Debt - September 30th, 2009
• How to Prepare For China’s Coming Derivative Default - September 13th, 2009