What this historic time for U.S. markets means for the rest of the world…

When we look back at the events over the past weeks, I think we can honestly call this is a historic time in U.S. financial markets. Starting with the Bear Stearns’ failure and moving onto the Fannie Mae and Freddie Mac bailout, the AIG bailout and the Lehman Brothers fallout, it has been nothing short of amazing.

What’s critical to see is that we are now facing problems that have been built up for years. It’s a sobering experience, as every financial company that’s hitting the skids got there due to reckless risk-taking. They took on leverage, cooked the books, and finally, left us with financial statements that were all a pack of lies.

There are two questions that now come to mind. One is, with the average person skeptical of a company’s balance sheet, and the “big boys” not having a clue how to how to assess counterparty risk, how can we start rebuilding a foundation of trust?

The other critical question involves the government and bailouts. At what point do they draw the line for handing out life support? Will they bail out other banks, car companies, insurance companies, the airlines? This is something we will have to watch, and it will be telling to see where the line in the sand is drawn.

One thing still seems certain to this editor: Ben Bernanke’s helicopter will not remain idle. No, he is firing up the engines, and this was clear on September 17, when the Treasury announced a special series of bill auctions to help the Fed expand its balance sheet. Translated, my friends, this means the Fed is going to print money to buy treasuries so the Fed can go on lending to all these ailing institutions.

Is it any wonder that gold, after getting hit in recent weeks, rallied over $100 an ounce in 10 hours on the same day of this announcement? This is just the beginning, and I’m sure we’ll see much higher prices in tangible assets as the dollar heads south.

It’s also no accident that on the same day China’s People’s Daily was on record stating that the world was “threatened by a financial tsunami.” Its message was that countries need to start building a new financial order that is not dependent on the U.S. and the dollar.

And it doesn’t stop there. Prince al-Walid bin Talal from Saudi Arabia said he will not be making any investments in the U.S. This kind of talk is not friendly to the U.S. dollar. After all, if you were China or the Middle East, would you want to be paid by a printing press?

We will most likely continue to see deflation in financial products, but it seems as though inflationary forces will rule the day in tangible assets.

When Markets Collide

When Markets Collide, a new book out by Mohamed A. El-Erian, puts a fresh perspective on globalization and market dislocations.