Socialism's Dry Run

Is it any wonder why many millennials gravitate toward socialism? As children, many of them watched their parents lose their homes after the 2008 financial crisis and real estate crash. Then they entered college and are now stuck with tens of thousands of dollars in student loans that prevent them from getting a car loan or a mortgage. Now they're in the middle of an even bigger global financial crisis, one that may leave 30% or more of the workforce unemployed, either temporarily or perhaps for several years.

Thankfully, the government and the Federal Reserve have stepped in with a mammoth rescue effort that will hopefully tide many people over until the economy rebounds. So that means for a period of time, either several months or perhaps years, the government will be keeping many people afloat. We'll get a feeling for what socialism will be like, meaning lots of people are not working and the government paying their bills. How long this state of affairs can last without some kind of societal impact is anybody's guess.

The immediate consensus when this crisis started was that the economy would rebound nicely in a "V-shaped" recovery in a couple of months, but that idea seems to have lost some of its steam. Now there's a growing belief that many parts of the economy will take a very long time to recover, and many industries, such as restaurants, air travel, sports and entertainment, and tourism, may return only as mere shadows of their former selves. How long will it really take for people to get comfortable again in large crowds in close proximity to others?

Many people probably never will, while others will take quite a while to do so, certainly more than a few months. So this economic situation may drag on for quite some time, and the government is going to have to pick up the slack, which is what happens in pure socialistic societies.

So now we will get a taste of what many people have wanted, or say they have wanted, for a long time. Even though Bernie Sanders has now dropped out of the presidential race, he may see his fondest dreams become a reality. Whether that turns into a nightmare or not remains to be seen.

The Fed and the U.S. Treasury will become an even larger presence in the markets and our lives for years and years to come. For investors, that should be a good thing. As we've seen over the past dozen years since the first global financial crisis, the Fed has been an integral part of the financial markets, keeping stock and bond prices elevated, perhaps more than underlying economic conditions warranted. Since 2008, the Fed has always been around to save the day. With this coronavirus crisis even more profound than the 2008 financial crisis, we can expect the Fed to be around even longer, and in a much bigger way.

Not only has the Fed promised "unlimited" buying of Treasury and government-guaranteed mortgage-backed securities, but it's also taken the unprecedented step of buying corporate bonds, too, not to mention commercial paper. No less a figure than former Fed Chair Janet Yellen is now suggesting that the Fed also be allowed to buy stocks, as I suggested here in my past two columns. Don't be surprised if that comes to pass at some point if the crisis deepens.

While this state of affairs is hardly the hard-core socialism along the lines of the Venezuelan, Soviet and Cuban models, it is clearly a socialistic endeavor all the same, though perhaps more benevolent. The intention, perhaps, is that these are only "temporary" measures to deal with the crisis at hand. But recent history shows that it's very difficult to stuff the Fed genie back in the bottle once it's been released.

Here we are, a dozen years removed from the 2008 financial crisis, and the Fed had only recently begun to pull back – measured by the size of its balance sheet – before it had to intervene again, this time on a much grander scale. Using 2008 as a guide, we can expect massive Fed intervention in the economy and the markets for probably twice as long, meaning two decades at least.

For those many of you who saw their equity portfolios decimated by the coronavirus crisis, you can probably take comfort knowing that the Fed safety net will continue to be in place for a long time to come.

But how might other people react? Will some people get the idea that it's okay to stay home and not work and have the government pay for everything? That could be a very poisonous idea, and hopefully, it won't infect too many people. Otherwise, we will turn out to be another Venezuela, only much larger.

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George Yacik
INO.com Contributor - Fed & Interest Rates

Disclosure: This article is the opinion of the contributor themselves. The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. This contributor is not receiving compensation (other than from INO.com) for their opinion.