QE-supporters such as Congdon say we must print money as the banks aren't lending enough – so broader money supply measures, which include bank lending, are shrinking. But the reason banks aren't lending is because they remain petrified of counter-party risk in the interbank market. Many of our banks are still concealing vast sub-prime losses in off-balance-sheet vehicles – the so-called "shadow banking system". So they assume other banks are doing the same.
Such mistrust between the banks – "we're lying, so they must be lying" – gums up the wheels of finance and starves even credit-worthy firms of the credit needed to invest and create jobs. The way to break this deadlock isn't to expand narrower measures of money via QE, but to end inter-bank torpor by forcing "full disclosure" of losses – as this column has argued for several years.
The numbers will be ghastly, of course, forcing the banking sector to restructure. Some big names will fail, their depositors absorbed by more solvent institutions. But, as history shows, this process can be managed and really is the only way that capitalism can work. I would have thought Congdon understood Schumpeter's "creative destruction". Yet the QE policy he supports is preventing this necessary purging.
QE is a short-term expedient with friends in high places. It has allowed Anglo-Saxon banks to re-capitalise themselves via a back-door bail-out, with many QE proceeds rebuilding bank balance sheets rather than being leant on. By propping up gilt and US Treasury prices, it has also allowed weak governments, for now, to keep spending. But at what cost?
In my view, the main cost is inflation – and the related debasement of savings. By inflating away our debts, the UK is also imposing "soft-default" on our creditors, implying higher future borrowing costs. For some time, QE-advocates had a lot of fun deriding those of us who warned UK inflation would outstrip the Bank of England's estimates. We've been proved right – yet the inflation has only just begun. The vast majority of that QE money in the shadow-banking system, on both sides of the Atlantic, has yet to enter circulation. When it does, and is leant against many times over, we'll see QE's true inflationary impact.
That will likely happen even if credit-creation multipliers are reined-in – which, of course, they won't be. Perish the thought that the all-powerful banking sector would ever be forced by our leaders to modify their irresponsible behaviour. If you hadn't noticed, the Basel Committee's decision to raise bank capital requirements, the centre-piece of the Western world's response to sub-prime, has been delayed for at least eight years. Earlier brave words from US and UK government on reforming our ever more concentrated banking sectors are now being replaced by platitudes in return, no doubt, for future campaign finance.
Congdon ends his article by saying that, had we not had QE, we would now have deflation. Well, we will never know. But, please, let's not cite the Japanese experience – as QE-backers so often do. Japan is a warning of what happens when you bail out busted banks and keep them going for ever because no one has the political guts to let them fail.
That's what caused deflation in Japan – the creation and continued existence of a moribund, zombified banking sector, weighing down an otherwise dynamic economy. Our recent actions in the UK, far from helping us avoid a Japan-style situation, are likely to cause one.
Modern capitalism, at its core, relies on the public's trust of fiat money and the sanctity of contract. QE is seriously undermining both those cardinal concepts. We're not supposed to call QE "money printing" because money printing is the last refuge of declining economic empires and banana republics. It also amounts to state-sponsored theft. And against that, yes Professor Congdon, I declare an "implicit prejudice".