On June 24, Europe’s central bank, the ECB, settled what it called T-LTRO III. Technically, this was an open market operation (OMO) and therefore a specific kind of LTRO. The “T” part of the program doesn’t really matter unless you happen to be running the short desk at a major European bank. For the public, the Roman numeral “III” added to the end was something to be concerned about, but only your second one.

The very first concern was the total amount settled back in late June. According to published figures, the ECB allotted €1,308,433,160,000 in what some people still call “free money.” Remember, this was about six weeks into reopening and three full months since GFC2 had taken the world by storm.

The net amount of “liquidity” added to the system wasn’t quite that large – banks were both bidding for additional bank reserves while also retiring old borrowing lines they had already pocketed under previous OMO’s – but it was still massive. While many in the media applauded Christine Lagarde’s big, bold move that’s because no one ever (wants to) remembers their LTRO history.

Forget whether or not bank reserves are effective money (they’re not), we’ve seen these things too many times in the past across an entire range of jurisdictions to know without a shadow of a doubt what’s really going on here. The reason why you don’t look at €1.3 trillion on June 24 and think, wow, that’s awesome, is because by June 24 we’d been told for months things were on the cusp of becoming awesome if not already so.

In other words, as late as late June, a whole continent of people should’ve been wondering why the hell European banks (742 of them, by the way) were showing up for 3-year funding at the ECB’s latest OMO scheme. Does that really sound like the “recovery” is progressing without the need for the quotation marks?

Of course not. That’s why the amount was everyone’s first concern, as it blends tightly within the second. What bank reserves really are, when they rise far and fast as they have done since 2008, they tell us only that central bankers are in panic-mode, reacting to the very real possibilities the monetary situation has already entered, and remains within, a critical state.

Even if you think the ECB is simply being overcautious, €1.3 trillion is a whole lot of caution that only begs the same question.

For one thing, 2012. The last time European monetary officials went the heavy LTRO route beginning in December 2011, it was likewise applauded for all the same reasons; including many who saluted Mario Draghi’s cautious but brave approach. And while the piles of “free money” piled up in the central bank’s deposit and reserve accounts (forcing Draghi mid-2012 to change the deposit rate to zero to try and get banks to do something other than sit on every last bit of liquid asset they could find, including reserves), Europe’s economy careened further into devastating re-recession just three years after the Great “Recession” had been declared at an end (with no recovery in between).

Furthermore, if money printing leads to inflation, and it does, then those past LTRO’s led to…disinflation. Again, bank reserves only tell us that policymakers are reacting to something else going on in the monetary system, something negative, which in all likelihood has already gripped the real economy and begun to drag it downward. Inflation and all.

That is why we continuously observe, all over the world, the solidly inverse relationship between gobs of “free money” and the inflation rate contrary to all wisely-held beliefs about gobs of free money. Central bank action can’t be that, otherwise this wouldn’t always happen:

In Europe, at least, some in 2012 and after would go on to complain that LTRO’s weren’t enough “free money” “printing” and that only full-blown QE would have worked.

Well, in 2020, we’ve got both QE’s and LTRO’s running together simultaneously. Even if the chart above wasn’t included, you’ve probably already correctly guessed which way inflation has turned.

As of the latest estimates out of Europe, Continent-wide inflation (HICP) tumbled into the negative (year-over-year) during August 2020 for the first time since early 2016. Despite oil.


Of far more concern, the so-called core inflation rate last month had decelerated all the way down to just +0.4% year-over-year. That’s the lowest on record.

While there are many problems with HICP’s and the CPI’s from which HICP’s are derived, we can’t help but note at least the downside correlation. Core rates, in particular, when they drop this doesn’t correspond to anything but the worst cases.

Furthermore, it might be tempting to think about monetary policy lagging inflationary results, but, again, history shows us not to expect it and even more important this is why in late June the LTRO’s were offered – the ECB was already aware that it had better supplement what “money printing” it had already undertaken earlier in the year. Lags cannot (never) explain the shortfall.

All of this, of course, comes at a rather inopportune moment, much of the public’s attention having been drawn specifically to monetary policy’s difficult relationship with inflation. To begin with, the entire world is trying to grasp the probable consequences of what had taken place back in March 2020 (which was not, as it has been widely reported, central banking’s finest hour; quite the contrary) while in official circles these central bankers are desperately trying to get their heads wrapped around what to them is a dangerously inconvenient inflation “puzzle.”

Along comes Europe to add a huge dose of fuel to the (lack of) inflationary fire. Yet, as always, the more “money printing” the less there ever seems to be of that very effect.

While some Economists will flatten out curves in order to try and reverse engineer some explanation for all this, the very fact they’d stoop to such noticeably ridiculous tactics tells you all you need to know. As does this latest LTRO. All these things are really the same thing.

Central banks don’t do money; they do “expectations.” The problem with trying to fiddle around with expectations when the global economy is short on money is pretty obvious.

Unless you’re a central banker.