TLTRO- The Ephemeral Long-Term pt 1

by Adam Millers, University of Iowa

Regarding disjointed musings over a dark roast at Java House, Dec 13 2014

So, to begin with, I guess the pertinent question here is not the what of the ECB’s Targeted Long Term Refinancing Option, but rather the why.  I.e. why is this deus ex machina central bank intervention the answer yet again?

Now it’s European disinflation concerns, then it was the Great Recession in the US… I have no doubt that the timeline trends back to the primordial ooze of accommodative monetary policy, but when is that? what is that? is there actually any logic to the vicious liquidity cycle, and whose logic is it? (namely, who stands to gain)?  Ok, so maybe there is no single “pertinent question,” and maybe there isn’t necessarily a question at all…


That being said, here’s somewhat of an answer, preceded by a skeleton of the source material:

  • Ricardian equivalence theorem, primary source material by David Ricardo
    • …and relevant discussions courtesy of the Library of Economics and Liberty ([italics mine] & truly a nice pair, albeit seemingly unrelated in, like, an epistemological sense)
  • Marx, on capital accumulation and overproduction, Capital
    • …and the more or less faithfully opposed, if not generally biased, reiteration of the aforementioned by the Mises Institute
  • “After Mill: Bastiat and the French laissez-faire tradition”; haven’t read it yet, but it looks promising from a quick skim, and is also from the same Mises Institute publication on the history of economic thought
    • …and Bastiat’s witty fables regarding the ills of protectionism and statist economics
  • Various research and other stuff about TLTRO and QE, skewed as much as possible to rational, quasi-objective perspectives because: Library of Economics and Liberty [italics remain mine] and the Mises Institute are the other two perspectives (not to mention Marx)

First, three quotes:

“The superficiality of Political Economy shows itself in the fact that it looks upon the expansion and contraction of credit, which is a mere symptom of the periodic changes of the industrial cycle, as their cause.” – Marx, Capital

“The imposition of a tax directly reduces the net worth of the taxpayer, but the issue of an equivalent amount of government debt generates an equal reduction in net worth because of the future tax liabilities that are required to service and to amortize the debt that is created.” – James M Buchanan, Richard Wagner, Democracy in Deficit: The Political Legacy of Lord Keynes

“Karl Marx created […] a veritable tissue of fallacies.  Every single nodal point of the theory is wrong and fallacious.” – the Mises Institute (just for LOL’s)


The Targeted Long Term Refinancing Option (TLTRO) is to Quantitative Easing what a man at his bachelor party is to that same man the day of his wedding– this man, whose parents made the questionable decision to name him TLTRO, has already committed to his wife QE in spirit, but wants to experiment a little bit before he makes that kind of commitment.  The chronology is similar too; European QE (QECB lol) is waiting at the altar, pretending that the groom hasn’t seen the dress yet.

Essentially TLTRO consists of reallocating massive amounts of capital with the objective of distributing liquidity to the European money supply.  While QE achieved this through direct purchases of securities on the open market in a pretty obvious liquidity swap, the TLTRO manages to hide the same fundamental principle in a policy less likely to rekindle memories of Weimar hyperinflation and etc.  By way of TLTRO, the European central banking apparatus finances the ability of non-central banks (though in the spirit of Too Big Too Fail, the distinction becomes increasingly arbitrary) to loan at lower rates, by loaning to them at lower rates, the assumption here being that this will solve the problem of a weak economy by… creating inflation?

Well no, that’s not actually the rationale.  Let’s break it down.  Lower borrowing costs should lead to increased borrowing.  This has something to do with user cost of capital and required rates of return, I think.  But those readings are from awhile ago.  Anyway– it should go like this.  People that make things borrow more money and expand their ability to make things, which involves using the borrowed money to build new places for other people to work and more equipment for them to operate.  So the expanded ability of some people to make things actually expands the ability of other people to buy those things because now they have new jobs in new places and new equipment.  And, to quote Vonnegut: so it goes.


So now to tie in two new ideas.

The Ricardian equivalence theorem explains that when the government finances its operations by way of debt issuance, it is effectively imposing a future tax.  It goes on to say that this should be acknowledged in market movements, because David Ricardo actually seems to think that people intuitively understand his equivalence theorem.  I mean, I think I mentioned this already elsewhere but it’s such a convenient reference– the Dutch tulip bubble…

Karl Marx spoke extensively on the subject of capital accumulation and concentration in the hands of an increasingly small portion of the population.  There is something called the Gini coefficient, used primarily by sociologists to quickly compare the levels of inequality in different places, and it provides fairly solid empirical evidence in support of Marx’s contention.  But if you remain unconvinced, I am feeling confident that I will return to discuss that idea in greater depth after getting a few things out of the way here first.

I am also feeling confident that my somewhat of an answer is becoming somewhat more of an answer, despite there still not being much of a question.


So if the Ricardian equivalence theorem states that sovereign debt is really a future tax, then would it be fair to say that QE and TLTRO basically constitute two really convoluted paradoxes wherein the government pays a future tax to itself in buying back its own debt so that it will be able to sustain future taxation in the form of more debt?  Wait– is this where lower interest rates and the glorified inflation become truly useful to the economy?  Now the denominator of your PV calculations has been modified, the cost of debt is much lower, and that money that you did owe just shrunk in terms of its own relative value.  So share repurchases and M&A abound, and the government slyly reduced its debt burden, which means it cut down the future tax burden of its constituents.

Is it okay with you if we call that tax burden “the cost of financing the portion of output arranged/facilitated/intermediated by the government?”  No?  Oh well, we’ll call it that anyway, because that allows us to say the following:

If the government, by way of the central bank, is engineering growth by way of manipulating liquidity so that the cost of present solvency is a financial black hole event horizon that consumes its own future insolvency– if the government, by way of the central bank, is taxing itself with its own debt when it performs QE and TLTRO and whatever manifestation of QEternity is next in line, and expanding its own proportion of the proportion of output that it arranges/facilitates/intermediates– if the government, by way of the central bank, is facilitating economic growth by way of effectively growing itself, well then how exactly are we supposed to believe in a free market?  And how exactly are we supposed to interpret the “LT” in “TLTRO?”


Some fables and aphorisms from Bastiat about laissez-faire economics seem applicable here.  Like Bastiat’s candlemakers union, seeking protection from the sun– only here it is the withered market seeking to insulate itself from… itself?  And here I think it would be appropriate, or at least fun, to draw a parallel to the Copernican revolution, but we’ll do that later.  For now: the fable of the broken window.

Bastiat’s fable of the broken window demonstrates a point of contention between the Austrian proto-market and the pre-Marxist “market-market” (both terms I just made up, to be characterized further as you see fit).  A boy throws a brick through a shop window.  Regarding this event, there are three potential levels of economic analysis, arranged hierarchically according to how well they conform to Bastiat’s model: 1) the destruction is inherently bad, and that is the end of it; 2) the destruction itself may be bad, but the stimulation of the economy that stems from the need of the storeowner to hire window repair specialists, and the subsequent multiplier effect that stems from the proceeds of that repair, are inherently good; 3) the stimulative effect of the window repair is inherently good, but relative to the stimulative effect attached to the lost opportunity for the storeowner to invest in incremental capital, it is “net-inherently” bad.  Hm, very interesting.

I’ll be the first to admit that I don’t actually know what I’m talking about here.


So capital accumulation results in overproduction, time and again, whether it’s a bubble or whatnot– then is not the extension of credit more or less analogous to the breaking of the window by the boy?  Then, counterintuitively, the accommodative monetary policy, the QE, the TLTRO– these are not remedies.  They are, in fact, the window repair specialists hiring the boy to break the windows so that they can be hired to repair them.  Do you see what I am getting at?

Increased interest rates here equal the repair of the broken window.  It is the restoration of value to the market, which was crippled by the relative distortion of currency, the foundational unit in this random dialogue… the restoration of value to the market in terms of the same metric used in determining the relative value of the currency… i.e. liquidity breaks the window and liquidity is the window repair.  

So now, the crucial question… whose logic repaired the window, and who was the window repair specialist?


Well I’m out of coffee so stay tuned for part two if you thought there was anything valuable to be gleaned from all that  ^^ 


*this post has yet to be edited