The End of the Middle Class?

The End of the Middle Class?
Al Martin
Oct 20, 2008

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One Step Away from the Brink: Financial Collapse Has Been Postponed, But the Damage Is Done

The global economy has stepped away from the brink of economic collapse… but the damage has been done. The brink was approached last week when the planet’s economy was perilously close to collapse, but thanks to unusually speedy government action by the G-7, including the United States, the planet’s economic system was flooded with money along with far-reaching guarantees for banks etc., regarding interbank lending and government purchasing equity directly, which was able to ease credit liquidity sufficiently to avoid a complete meltdown.

We saw that subsequently reflected in rallies in equities and the sell-off both in US Treasuries and other government bonds which is what should have happened to deal with what has become in essence a Global Bailout. So does Joe Six Pack Investor live to fight (or invest) another day?

So does Joe Six Pack Investor live to fight (or invest) another day?

In the last 3 weeks, we have seen a severe depletion of the traditional Joe Six Pack assets. We have seen the Great American Lie has been unraveling, especially the lie that your house is your greatest asset.

In other words, the so-called Great American Dream turns out to be the Great American Lie, which has been thoroughly exposed in recent weeks by global economic events.

The response by Joe Six Pack investors has been to aggravate the financial problem by panic liquidation of domestic common stock mutual funds, which we have seen over the last 20 sessions or so.

This has made the problem much more difficult for governments to manage because of the enormous cash demands to pay for these securities that Joe Six Pack with his knee jerk panic reaction is creating.

Joe Six Pack Investors began the panic selling because they didn't know what else to do. Every great depression in the United States has been caused by knee-jerk reactions from Joe Six Pack – who then become the greatest victims of the depressions that they create. They simply don’t know what to do. They have their IRAs and 401 Ks invested. The debacle of 1991-92 is still fresh in their minds and they don’t want to see IRAs and 401Ks end up to be half of what they were 6 months ago.

Their knee jerk reaction is simply to sell because they don't know any better. Since most of them invest automatically in these funds, they will be buyers of the same stocks that they sold at higher levels. But that's the way it's supposed to be. The unwashed are supposed to be the victims.

The market is like a self-feeding mechanism. What I mean when I say that the damage has been done, is that financial institutions have been socialized. This socialization will weigh on the future performance of financial sector stocks for decades to come, just as it has done in Japan.

The entire planet, not only the United States that has been practicing capitalism is effectively moving to socialism out of necessity. What Joe Six Pack needs to understand is that this would have happened ultimately anyway, i.e. that capitalism would not survive over the long term as the world has became a 'smaller' place. What we are seeing now is simply an acceleration by market events of what would have happened anyway.

The long term damage to the planet's economy has been done. What is occurring now is a knee jerk reaction by governments to over-regulate. And this has already begun to occur even in the United States there is a movement afoot, even among Republicans, to dramatically reduce leverage. And therein is the key.

If you reduce economic leverage that is employed by the banks and financial houses, you are reducing future profitability, as you are reducing future risk. You are also reducing future liquidity and reducing the value of asset classes in the future. That's what socialism is really all about when it comes to economics. Socialism is a stratifying of assets and asset classes and furthermore expanding the gap between the super-wealthy and the super-poor. And that's what socialism leads to.

The concept of having a middle class in a socialist state is artificial. To a large extent, the United States has avoided socialism by maintaining the Big Lie principle. This means that you telling the people that they are middle class, that they can work all their lives, invest in their IRAs and 401Ks, and then retire and everything will be OK.

And you never have to learn anything about economics and you never have to know anything. You just have to trust in your government -- and its stability will be maintained. And of course that's all a Big Lie.

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