Happy New Year, readers, but before we get on with the debates of 2010, there's still some ugly 2009 business to report: To wit, the Treasury's Christmas Eve taxpayer massacre lifting the $400 billion cap on potential losses for Fannie Mae and Freddie Mac as well as the limits on what the failed companies can borrow.

The Treasury is hoping no one notices, and no wonder. Taxpayers are continuing to buy senior preferred stock in the two firms to cover their growing losses-a combined $111 billion so far. When Treasury first bailed them out in September 2008, Congress put a $200 billion limit ($100 billion each) on federal assistance. Last year, the Treasury raised the potential commitment to $400 billion. Now the limit on taxpayer exposure is, well, who knows?

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.

The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.

Even better for the political class, much of this is being done off the government books. The White House budget office still doesn't fully account for Fannie and Freddie's spending as federal outlays, though Washington controls the companies. Nor does it include as part of the national debt the $5 trillion in mortgages-half the market-that the companies either own or guarantee. The companies have become Washington's ultimate off-balance-sheet vehicles, the political equivalent of Citigroup's SIVs, that are being used to subsidize and nationalize mortgage finance.

David Fuller's view The onset of the Fannie and Freddie debacle dates back to the first Clinton Administration, as veteran subscribers will recall, and eight years of Bush Republicanism did nothing to improve the situation. Today, I am less interested in the politics behind the latest decision detailed above, than in its probable implications for various markets. After all, few of us can change the political environment, should we wish to, but I think all of us would like to protect our families' financial assets.

I have some suggestions.

This latest chapter in the Fannie and Freddie debacle reaffirms the deterioration in USA government finances. Consequently, it is not bullish for the USD, although most forex pundits have been forecasting a further rally for the greenback as the New Year commences. Swings and roundabouts, and debates over which fiat currency is least deplorable in terms of maintaining its purchasing power aside, do we really have the conditions for anything other than a temporary short-covering rally for the US dollar? I do not think so because it is fear of a global economic calamity that would most likely trigger another dramatic flight to the USD, as we saw in 3Q 2008. I will change my view when the facts (price chart trends) change but so far I have not seen conditions for more than a technical rally by the greenback, which is beginning to show signs of fatigue, not least against the Canadian dollar.

The deterioration in USA government finances should mean that the Fed will keep on printing plenty of paper dollars. This is bullish for gold as the yellow metal is increasingly monetised in the eyes of investors. To the extent that the USD weakens, it should also be a tailwind for most other commodities. Economic recovery provides an additional tailwind for resources.

The Fed is also likely to keep short-term interest rates low, maintaining bullish monetary conditions for the stock market. Other central banks are also persisting with accommodative monetary policies for the time being. A few have nudged short-term rates higher where GDP growth is firm and inflationary pressures rising, but they are still historically low. This remains a favourable environment for Fullermoney themes as 2010 commences.