"...So George W.Bush is going to nationalize the US housing market. If that sounds dramatic, then just watch what happens to gold..."

"THE MARKETS are in a period of transition," said George W.Bush in his speech from the Rose Garden on Friday.

"[But] America's overall economy remains strong enough to weather any turbulence," he added - and to prove it, commander-in-chief just put the credit of the entire US nation on the line.

Underwriting the $100 billion in subprime real-estate losses forecast by his top monetary wonk, Ben Bernanke at the Federal Reserve, Dubya is in effect doing what many small-town US banks did during the early stages of the '30s Depression.

Put all the money where passers-by will see it, right there in the front window, just to prove that the money exists. That way, or so the logic runs, anxious depositors will see their money's still there...and they'll wait a while longer before forming a queue to empty your bank in a panic.

The big difference this time - besides the sheer size of Dubya's bail-out - is that Washington is putting America's credit out front, rather than hard cash. The US government doesn't have any cash to put on display; instead, it owes the best part of $9 trillion already. Now George W.Bush is going to add the cost of subprime debt defaults on top, bailing out this summer's crop of late-paying home buyers and underwriting the next two years - or more - of refinancing.

What's an investor to do when the government meddles so deep in the markets? Stocks leapt and the Dollar slid back as news of Bush's pork-barrel pledge spread early Friday. But during the credit market turmoil of August 2007, professional money managers had fled into the apparent "safety" of US government debt. And US bond prices fell sharply as the promise of fresh Treasury debt to fund Bush's bail-out became clear.

Now those same investment-fund bondholders - and especially those planning to stay long of US debt as the Fed cuts US interest rates - are going to get "shellacked" as our friend, Dan Denning of The Daily Reckoning in Melbourne, Australia, puts it. Because the credit put on display in the Rose Garden on Friday is merely the credit of the US government itself. And that credit only exists for as long as US Treasury bonds find a bid at auction.

It's a bold move to be sure, and Bush likes to be known as "The Decider" according to Bill Gross, head of Pimco, the world's biggest bond fund. Taunting Dubya's man-of-action self image last week, Gross told Dubya to step into the subprime disaster - "write some checks, bail 'em out."

Come Monday, Larry Summers of Harvard University joined the chorus, too. "Now is not the time for the authorities to get religion and discourage the provision of credit," he wrote in the Financial Times.

Add the top academic economist outside the Fed to a guy running $692 billion, and that makes some chorus, right? We can only guess at the phonecall that Ben Bernanke took from the West Wing mid-week. "The government's got a role to play" they must have agreed - a line Dubya repeated on Friday. And in dredging up credit to bail out the US economy, the Decider's three-pronged plan is going to spear bond holders three times over.

FIRST, as Washington's overnight briefing to the press explained, the Federal Housing Administration is going to guarantee loans for delinquent US borrowers. Set up during the Great Depression, the agency already acts to insure mortgages for low- and middle-income borrowers. Now anyone more than 90 days behind with their payments will get government-supported finance at lower, more favorable lending rates.

In other words, Washington is going to stall foreclosures by lending money to distressed debtors.

SECOND, Bush is going to ask Congress to suspend - but only for "a limited period" according to the Wall Street Journal - a US tax provision that penalizes borrowers who lose their homes to repossession or who try to reduce the size of their loan by refinancing.

Meaning that the government's going to cut its own tax receipts.

THIRD, the US government - through an initiative led by the Treasury and the Housing & Urban Development department (HUD) - will identify home-buyers at risk of defaulting between now and 2009. For them, it will create "more favourable" loans, working with private lenders and insurers to reduce rates in the market and reverse the move away from higher-risk borrowers.

Put another way, Washington is going to underwrite the next two years of subprime re-financing, actively seeking out defaults before they happen.

That means more new government-funded loans still. Because if the private banking sector can't raise funds to keep subprime US consumers in credit, then the US Treasury will. Or so Dubya and Wall Street believe.

But the last time America's credit rating came into crisis - during the late '70s - inflation ate both equity and fixed-income investors alive. Gold, on the other hand, rose by 510% for Dollar-based buyers. The metal rose five times over against the British Pound too, and spot gold prices gained more than 370% for German investors. Japanese gold buyers made four times their money inside three years.

Of course, past performance is no guarantee of the future, as the City regulators here in London force UK investment funds to remind their clients. But Spot Gold Prices just closed August '07 up more than 4% from the end of last year to record only the 11th month ever to top $650 per ounce. Six of those months have come in 2007 - and the global bid for gold only looks set to grow stronger as the panic of August slips into September.

"The early indications are for a very, very strong year for India's gold demand," said Philip Olden, managing director of the World Gold Council, on Thursday. Looking ahead to the traditionally strong gold-buying festival and wedding season now about to begin, he forecasts Indian gold demand in 2007 will rise by one-half from 2006, hitting record levels.

Global demand for physical gold rose by 19% between April and June according to the WGC's data. China's gold demand surged by nearly one third, says a Reuters report, while Turkey's gold imports could set a new record and gold buying in the Middle East is set to rise as tourism grows.

"We are seeing a very significant restocking process going on in the markets, primarily for India, as we are heading to the heavy festival season," says Andy Montano, a director at ScotiaMocatta, the bullion bank, in Toronto. "I suspect as we move towards the latter part of the year, the buying pressure will increase in line with the fact that we are heading towards the Christmas period [and] the Chinese New Year," agrees Darren Heathcote of Investec Australia.

Or perhaps foreign buyers will choose US Treasury bonds instead of gold. Nothing is certain, not even the looming inflation due from this week's record-high wheat prices and resurgent crude oil.

And besides, George W.Bush just put the entire credit of the US nation right there, out front in the shop window, for the whole world to see.

The gambit didn't always stave off a run on the bank in the 1930s. But you never know. It might work this time - for a while.