Effect of Lockdowns on Fiscal and Monetary Policy

Collective Effervescence and the COVID-19 Response

Introduction

With 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 Effervescence

Collective 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. 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 is the new COVID-19.

Responses to COVID-19

The first manifestation of collective effervescence in response to COVID-19 was the collective cutting of interest rates across the board to zero (Wade, 2021). This was coupled with $700 billion in QE in March 2020; however, markets were not satisfied, and selling continued. The central banks of the world worked on another response, which was the coordinated international action to lower pricing on U.S. dollar liquidity swap arrangements (Wade, 2021). This agreement was followed by the creation of a commercial paper funding facility, “with the authority to buy corporate paper from issuers who might otherwise have difficulty selling the paper on the market, at a cost of the three-month overnight index swap rate plus 200 basis points” (Wade, 2021). Other new creations included a creation of a primary dealer credit facility and the creation of a money market mutual fund liquidity facility. Days later, U.S. dollar liquidity swap arrangements were extended to more international central banks (Wade, 2021). And then “in co-ordination with the Federal Reserve Bank of Boston, the Money Market Mutual Fund Liquidity Facility expanded the list of acceptable collateral required for a loan, allowing high-quality municipal debt to join the list (Wade, 2021).

Finally, by March 23, 2020, “in its most sweeping and dramatic intervention in the economy to date, the Fed announced a series of measures employing a wide range of the monetary policy authorities available to it, all with the aim to ‘support smooth market functioning’” (Wade, 2021). That very same day marked the low of the S&P 500 trading at 2191.86. The central banks finally got the message across to markets that they would do whatever it took to calm them, provide the necessary backstop, and inspire buying—and thus buying commenced as markets more than doubled from March 23, 2020 to the end of 2021. Collective effervescence and the COVID-19 totem helped inspire the belief that the markets could be saved by central bank and governmental intervention (the combined strategies of loose monetary and fiscal policy) and that the public should buy stocks with their stimulus checks.

The Coronavirus Aid, Relief, and Economic Security (CARES) Act and the American Rescue Plan Act along with eviction and foreclosure moratoriums helped give the public the sense that the central banks and the governments of the world were not going to leave the public in the lurch while at the same time letting the wind out of the sails of the economy through global lockdowns (Alpert, 2022). COVID-19 provided the totem for the collective effervescence; the media helped to paint the picture of a world in severe crisis from a new deadly flu virus that would quickly destroy all human life on the planet if drastic actions were not taken. The only thing missing was the guarantee that banks would backstop the markets—and that guarantee was assured on March 23, 2020, and markets lifted off from that point onward.

The level of intervention was vast nonetheless—from lowering interest rates to zero and ensuring that zombie companies could continue to leverage their (uncertain) future without cost to providing business owners with funding through PPP to keep operations going, the Federal Reserve and the US government acted as conductors in the now time-honored ritual of market bailouts that had been in place for the better part of a decade: there would be no permanent wealth destruction—wealth transfer, okay—but permanent wealth destruction would not be permitted. The public clapped and applauded, and thanked the government for its stimulus checks all through the year, and welcomed the idea of universal basic income (UBI) already put forward by the “Yang Gang” in the 2020 Democratic primaries, prepping the public for things to come, no doubt—just as in a religious ritual there is a pre-ritual ceremony that prepares the assembly for the main event.

In 2020, the main event was the staving off of utter destruction and desolation thanks to central bank largesse, government stimulus checks, and coordinated action and policy the world over by the banks of the world. It was collective effervescence at its finest hour, as the world partook in a dance macabre of COVID-19 fear and paranoia while accepting succor and solace from the financial institutions. The end result, however, was that people began splurging—buying anything they could get their hands on (from land to homes to cars to equities to crypto and even precious metals) causing prices to surge, supply to dwindle, and already stricken supply chains to be struck still further. The outcome of this exodus from cash (raining down like manna from heaven thanks to the printing presses of the central banks) was a totally predictable surge in inflation (which the Federal Reserve at first pretended would not occur, then acted as though it would be only temporary, then finally admitted it was here to stay). The act played out like a religious experience: hints of inflation being spoken of in private, like stories of the boogeyman or the devil appearing at night to snatch 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.