I Messaged quite a bit to Machaon about this.
I just hope you don't feel that we've (meaning all that have posted and replied to this topic) been in anyway too critical of your idea.
As I said to you in PM, if any programs are developed to gain Kernel threads/processes then no matter if it's a graphical button on a screen or a key press, it can be bypassed.
This is the entire method also used in Cracks and Key-generation.
You have to think of Passwords similar to a key going into a lock, the key might have a specific shape that is relevant to a password, but if you have the right tools you can get into the locking mechanism and just press the areas that are relevant to open the door. (Which is pretty much what these kernel snooping programs can be created to do)
Dongles are one way of encrypting, but there are otherways, for instance:
You have a password and a chip-pen that you place into a hole on your keyboard. The chip is used to process the encryption of your password to open up your system, software or even hardware. Without that chip being there or the correct password being supplied the system, program, hardware is rendered useless.
(This is instead of the Magnetic tape cards that can easily be read with some old VHS hardware.)
As I mentioned also to Machaon there is still the problem that people can corrupt your DATA. For instance loading a Kernel to RAM to give back data to your system to make it think the full RAM is free, when in turn it corrupts your data through CRC's so that your passwords don't work locking you out of your own system. Possibly their is the trojan software that can watch using your kernel your exact processes and movements through your system (this is what BO is capable of) rather than having a log that you take of someones machine, you actually view what they type and even see what they are typing before they encrypt it.
When you look at computers like this, you begin to realise that security shouldn't be a concern, as there is no real security other than making your system standalone and not connecting it to a network or the internet. (Even then there is ways of getting information but this takes some seriously sophisticated hardware which needs to "Find it's way" to you computer. Not that I have had any experience with Bug planters.)