Effect of Lockdowns on Fiscal and Monetary Policy Essay

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Collective Effervescence and the COVID-19 ResponseIntroductionWith the arrival of COVID-19, the world governments collectively responded in likeminded manner, with lockdowns, shutdowns, and 24/7 non-stop media coverage fueling panic and fear among the populace. The result of this collective approach was a rapid squelching of the global economy and another collective response—this time from central banks, which altogether injected trillions of new liquidity into the global financial system. The US launched its Paycheck Protection Programs (PPP) and soon small business owners were flush with cash that could be dropped directly into markets to take advantage of a soaring stock market or a booming real estate market (Cachanosky et al., 2021; Mosser, 2020; Tetz & Herthel, 2020). One way to explain this collective action is through what Emile Durkheim described as collective effervescence, the phenomenon of a diverse community coming together as one to express the same thought and take part in the same action or ritual. In this case, COVID-19 acted as the totem—the sign that stimulated the central banks and governments of the world, the media, and the people—to engage in the enormous liquidity-infusion that was destined to help fuel inflation.Collective EffervescenceCollective effervescence was a term defined by the sociologist Durkheim to explain the sociological aspects of religious ritual—specifically, how a community of diverse people and classes could all at once come together to show similarity or likeness of thought and action, centered around a religious totem or symbol of the event that had prompted them into this likeminded action. For instance, a Christmas tree could be a totem of an event (Christmas) that moves diverse people within a community to celebrate the yuletide season, go to church, put up lights, buy presents, and hold feasts for family members. This is an example of collective effervescence at the sociological level. At the economic level, the same idea can be applied to central banks’ response to COVID-19 and to government lockdowns, which necessitated some type of action from central economic planners—i.e., liquidity injections in the form of REPO purchases or supporting credit markets (Cachanosky et al., 2021; Coroneo & Ozkan, 2021).In the COVID-19 response, there were many totems—collapsing markets, media panic, government lockdowns, school shutdowns, overrun hospitals—and there was also a precedent established for global central bank intervention set by the 2008 great financial crisis in which the US Federal Reserve launched its unconventional monetary policy in the form of quantitative easing (QE). The precedent or “ritual” was renewed twice more after that, and everyone expected a fourth round of QE or even what some called “QE infinity” to be brought back around. It was just like when a religious custom becomes part of the culture and tradition of the people—it might have started on a lark, but it continued because people liked it. It was the same with QE: markets came to depend on it the same way sugar junkies depend on sugar to get them through the day, or the way alcoholics depend on alcohol to get them through the week—take it away and the world crumbles for them for they have other support system or structure in place.

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That is what QE became for markets after 2008: and that is why the Federal Reserve has added trillions to its balance sheet in response to the COVID-19 totem. It has done so in a state of collective effervescence with the other central banks of the world, all of which took part in the liquidity pump that pushed markets to all-time record highs—markets, which are now falling into bear territory (like the Nasdaq) after the central bank has given all to understand that it will be draining liquidity and entering into a phase of quantitative tightening. Another panic will ensue, and another round of collective effervescence will likely result—but for now the world has a new totem to replace the old one: Ukraine/Russia…

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…one’s children away; then the hints began being supported by evidence; then the evidence grew, and finally the religious (bank) leaders had to face the facts and admit that the devil (inflation) had crept into the equation somehow—the same way Paul VI famously admitted the smoke of Satan had penetrated the Church after Vatican II. The banks and governments were playing the same role in a scene of collective effervescence in which the ending could be seen coming from a mile away: an outbreak of war—the only possible relief from a soul-crushing totem that could not be removed from the collective consciousness any other way; it would have to be replaced by a new totem—Putin, the new Hitler.ConclusionThus, one sees how central banking and government response to the COVID-19 pandemic can be explained by the sociological phenomenon of collective effervescence, described by Durkheim originally in the context of a religious ritual. Today, the religious ritual is an economic and financial ritual—salvation does not come from the Cross but rather from central bank backstopping of markets and the provision of liquidity. Loose monetary and fiscal policy combine on the parts of government and central banks to give the manna markets desire; the only problem is that there are economic consequences for this kind of largesse, and they are now being seen. The totem of COVID-19 has overstayed its welcome (protesting truckers around the world have a way of convincing governments that it is time to move on), but to keep the market denizens in a posture of obeisance, a new totem is always needed—and the new one hails from Russia: the Russian aggressor, sweeping down upon the poor unsuspecting victims of the Ukraine, threatening nuclear war upon the world. Fear, anxiety, concern now dominate the headlines, and the media plays its part of whipping the public into a frenzy as markets fall, and investors along with main street cry out for government and central….....

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