Five Long Years in the Fed’s Potemkin QE Village

The Fed’s Potemkin Village

JM Bullion

We pretend to work and they pretend to pay us.” Anonymous Soviet Union “worker”

Five Long Years in The Fed’s Potemkin QE Village

The term  Potemkin Village comes from the story that Potemkin in order to impress the Empress of Russia constructed fake buildings  Pe

Fake Potemkin facade covering The National Museum in Beijing China while it is being rebuilt

The term Potemkin Village is derived from the account that Prince Grigory Potemkin once constructed a fake but lavish looking village along the banks of the Dnieper River in Crimea to impress Empress Catherine II of Russia.*

The rising stock and housing markets are the Federal Reserve’s Potemkin facades designed to convince us that the economy is recovering under their quantitative easing (QE) program. Potemkin villages are usually set up for a short duration and act as a cheap substitute until the real thing can be put in place. The Fed’s QE program, however, has been an expensive long term scheme.

Most failures or disasters are of limited duration. Think of the short-lived New Coke or the Edsel. Failures are quickly identified and remedied, unless they are government disasters – those are rewarded with longer tenures, more excuses and more funding.

Through QE and its zero interest rate policy, the Fed has been attempting for five years to paper over an ailing economy with diminishing returns. Rising stock and housing prices disproportionate to their underlying values act as a diversionary facade for a poorly performing economy.

Fed Dot Bomb

In 2009, Ben Bernanke, Chairman of the Federal Reserve argued that $1 trillion in bail outs via printing money was needed because the economy was weak. Click here to listen to him explain how money printing works and why it is necessary.**

In 2013, four trillion dollars in successive QE money printing programs later, bailonomics is still in effect because in the words of Mr. Bernanke “the economy is weak

The phony recovery has been raging since 2009. From recovery summer, to green shoots, to wait till next year, we have been hearing five years worth of words of encouragement about the economy coupled with threats that maybe one day, one year the Fed may start to “taper” its $85 billion a month QE program. That moment hasn’t come and in its place we hear excuses why need more QE and renewed threats to one day taper it.

Is the Fed bluffing?

After five long years of hearing about an economic recovery, we have recovered right into a recession.

The recovery is a fuagzi, a fake.

Donnie Brasco Tells Lefty His Stolen Diamond is Fake

But Wait, They Told Me There is a Recovery

Deconstructing the Fed’s Potemkin Recovery Villages


Those insisting there is an economic recovery will point to the 2.8% 3rd quarter GDP growth. A 2.8% GDP print is not very impressive especially when you consider a good portion of the third quarter GDP growth was inventory build up which is a one time event, that the personal consumption aspect of the GDP number wasn’t strong and businesses cut back on spending in the third quarter.

Yet putting aside the low GDP percentage increase, the total dollar increase in GDP was less than the amount of money that the Fed printed during the quarter in connection with QE. Where would GDP have come in without the $255 billion that the Fed printed to support the economy during the third quarter?

Stock Market

But the stock market is at all time high. Isn’t this evidence of an economic recovery? The gains in the stock market while impressive do not reflect the underlying health of the economy. Rather, they reflect what happens when excess liquidity is pumped into the financial system.

Artificially low interest rates encourage speculation and there is no better place to speculate on a grand scale than in the stock market. As a result we have seen massively unprofitable companies go public and be rewarded with multi billion dollar market capitalizations. When saving money in a 0.8% certificate of deposit is a suckers bet, anyone with excess cash heads to the Wall Street casino.

Further driving stock prices higher is not just excess cash, it’s the narrative that many companies on the stock markets are making money and increasing their earnings and therefore their lofty valuations are justified. A not so deep look shows that many companies have improved their earnings not by healthy revenue growth, but by controlling expenses (i.e. firing workers) and using excess cash to buy back their own shares thus limiting share supply and driving up earnings per share.

Ostensibly this Wall Street bonanza creates a “wealth effect” which translates into an improving economy and jobs. It doesn’t. It enriches the “one percent” and creates asset bubbles in the fine art and luxury housing markets in expensive neighborhoods.

Real Estate

But, but real estate, what about the housing recovery, that’s real right? While economic cheerleaders insist that the real estate recovery is “still on track”, regular readers of this blog know what we think of the fake real estate recovery.

The real estate recovery has been nothing more than an increase in housing prices driven largely by QE which has lowered interest rates giving investors access to cheap capital with which to buy homes and drive up prices. As we noted earlier this year there is no housing shortage, just an inventory shortage because 25% of homes in the U.S. have underwater mortgages and can’t sell, there are millions of foreclosures that have not hit the market and new homes are being built at 1/3 the pace their were in 2004-06.

This creates a similar situation for housing price increases as we have seen in the stock market-artificially low supply and artificially juiced up demand.

Yet the real estate industry and media spent the spring and summer cheering on rising home prices. We noted earlier this year that rising home prices are not helpful to the overall health of the real estate market as they make homes unaffordable for the next generation of home buyers, the millennials, who are already struggling with high student debt loads and poor job prospects.

The cheering on of rising home prices is as foolish an endeavor as the Fed’s goal to create inflation. Imagine if the media covered gas, food and energy prices the way the they cover housing: “Gas Market Hopeful For Multi Year Recovery As Prices Top $3.50 a Gallon”; “Milk Prices Projected To Rise 10% This Summer Encouraging an Increase in Consumption”.

We are now reaching the limit on higher home prices because the real economy can’t support them. Indeed, according to the California Association of Realtors, less than one in three Californians can afford a home in that state.

There is a limit to what QE can do for the housing market once home prices reach levels of unaffordability. Fewer people working, making less money, when home prices and interest rates are rising means fewer people can qualify for mortgages and afford to buy homes at higher prices. End of housing price appreciation.

As long as QE continues, however, money will continue to flow into the stock market as rising stock prices may make prices too expensive, but not unaffordable.

Gold and Silver Down

Gold and silver prices are down significantly this year, isn’t that evidence that the economy is recovering and the worst is over? People hold precious metals as hedges against inflation and to protect against what Ben Bernanke calls “tail risk-really bad outcomes“. Prices of gold and silver are down presumably because the worst is over and there is no inflation.

The price drops of gold and silver, however, reflect the selling of paper gold and silver on the exchanges. The physical markets tell a different story as sales of American Silver Eagles already reached an all time high this year sales of silver in India are hitting records and Chinese buying of physical gold and silver continue at a torrid pace.

What The Fed’s Potemkin Real Estate and Stock Markets Are Covering Up:


An economy can’t be characterized as recovering if more people are becoming impoverished. According to the most recent U.S. Census Bureau statistics 50 million people, or 16% of the population can be characterized as in poverty. The 2013 number is up from 47 million people in poverty in 2012 and 2011. According to the Census Bureau data, without government assistance in the form of tax credits, Social Security and other benefits the number of poor people and percentage in poverty would have been even higher.

But interest rates are at historic lows!
But the stock market is up!
But home prices are rising!

Food Stamps

A recovering economy should see a decline in the number of people seeking government assistance. According to the United States Department of Agriculture (USDA), however, there are a record 47 million people on food stamps in the United States. That’s nearly one in six people in the United States. In January 2009 at the start of the recession, the number of individuals on food stamps was 32 million.

But interest rates are at historic lows!
But the stock market is up!
But home prices are rising!

Poor Labor Market

A healthy economy has an increasing number of jobs and increasing wages. The current economy has neither. Real median household incomes are lower now than they were at the start of the recovery in June 2009 and fewer people are working. The labor participation rate, which tells us how many people in the country are connected to the labor force hit a thirty-five year low last month.

But interest rates are at historic lows!
But the stock market is up!
But home prices are rising!

The Economic Plight of Entire Generation

A vibrant recovering economy provides opportunity for young people. This one doesn’t. Millennials or Gen Y are more economically disadvantaged than the rest of the population with crushing student low debts and higher un/under employment. The economic plight of the millennials means they are adding fewer productive work hours to the economy and purchasing fewer homes and cars than their predecessor generation.

But interest rates are at historic lows!
But the stock market is up!
But home prices are rising!

What Will The Fed Do Next? – MORE of the Same – Talk Taper Print Paper

Despite the abject failure of QE, it persists as does the alternating intermittent, then incessant taper chatter from the Fed regional presidents.

“I would not take off the table at least consideration at that time” said Atlanta Fed President Dennis Lockart earlier this week about the possibility of tapering QE in December. Tapering must be a very cold dish as its supposedly been on the table most of the year.

Back in June we heard Dallas Fed President Richard Fisher’s hawkish comments advising that the Fed get off the monetary cocaine. Yet last month he was to cooing like a dove explaining “we can’t taper in October because it’s ‘too tender’ a moment.”

Tapering QE, however is not stopping, its just a reduction in the mega money printing. QE’s 1, 2, and 3 were all stopped and replaced with the next sequential QE. It’s possible the current QE might be tapered too. Keep in mind that even if the Fed were to taper QE it would still mean a continuation of money printing on a grand scale.

The Fed keeps printing because they are trapped and some, perhaps all, of its members are Keynesians and believe in it. There is No Fed Exit – the further down the QE road they go the further they must go. Recently, Mr. Fisher admitted as such saying QE can be tapered but NOT STOPPED.

Back in June we wrote in The King is Surrounded: Bernanke’s No Exit Dilemma: “The Fed knows that if they print too much they risk loss of confidence in the dollar and hyperinflation, and if they print to little, rates will rise and the economy will crash taking down the stock and real estate markets with it.” So they talk taper and print paper.

But the Fed’s bluff is about to be called. This can only go on for so long. They either start tapering QE with a view towards shutting down the program and unwinding their balance sheet or they continue QE until confidence in the dollar is lost and it collapses. The former option would cause the stock and real estate markets to crash along with the economy. The latter would also cause the economy to crash but with longer more devastating consequences. Since no one wants a crash to happen on their watch, we are near certain that the QE will continue with the Fed taking their chances on a currency collapse at some point in the uncertain future.

The Fed could try a one off taper but that would have to be quickly reversed and backed with increased QE.

The concept Mr. Bernanke espoused that tapering should not be considered a tightening monetary policy is a myth. The Fed can’t just assure the markets that they will taper and shut down QE but keep interest rates low. Rates will go higher if QE were stopped not matter where the Fed sets the Fed funds rate. Rates have been heading higher not because the economy is improving but because of the threat that QE might end. The Fed needs interest rates to remain low and only way to keep them low is to continue QE.

Here Comes Janet Yellen!

And now we have Janet Yellen, the woman the President has nominated to lead the Fed. She is ready to grab hold of the Fed’s dollar printing press and start thinking about negative interest rates.

We believe that the Fed under Janet Yellen will not tear down the Potemkin facade but rather will just add a new layer of thicker wall paper – i.e. increase QE in a vain attempt to jump start the labor market

The Fed, under Yellen will not allow the economy to restructure on its own terms and allow interest rates to go higher and debts to be liquidated. She will try her hardest to keep interest rates artificially low. The Fed, however, is likely to lose control over interest rates during Yellen’s term as the marginal benefit from low rates diminishes and the Fed has to increase QE to keep supporting the economy. Rates will rise in spite of the Fed’s money printing which will prompt more money printing in a vain effort to stop the rise in interest rates.

That is when the long predicted double digit consumer price inflation kicks in.

Today at her Congressional confirmation hearings, Janet Yellen will be portrayed as a fiscal dove and she will do her best craw like a hawk to assuage concerns that she won’t print the U.S. dollar into oblivion. This should convince enough Senators to approve her nomination.

Soon into her term as Fed Chair we will see that the taper bluffing/money printing empress has no clothes and it won’t be a pretty sight. The cracks will start to show soon in the facade of the housing and stock markets and eventually both will crumble, prompting more Fed money printing action.

When the Potemkin facades of rising stock and home prices finally collapse we will be left with the illusion of a former recovery. Stock prices and higher home prices will gone but poverty, unemployment and a declining standard of living will still be with us.


Here is an interesting video covering Potemkin shopping facades that were erected for a recent G8 summit to make the Irish town appear more prosperous.

The contrast between the Irish man in the street and the central planner interviewed is instructive. The man in the street scoffs at building fake shop facades as a waste of money, while the bureaucrat cheers on the spending of public money to polish a turd.

Irish Irate About Fake Store Fronts Erected for G8 Summit:

Shop Amazon – Countdown to Black Friday Deals Week

* The irony behind Potemkin Villages -There are scholars who believe Potemkin never built the fake village along the Dnieper river. Potemkin stories!

**while I was testing the link I was listening to Pink Floyd’s “Brain Damage” from the Dark Side of the Moon box set. As I watched Bernanke explain the virtues of money printing, Brain Damage provided a fitting soundtrack overlay of hysterical cackling

Pink Floyd – Brain Damage

Buddy Guy – Five Long Years

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Further Reading:

Gold Buying Guide

Silver Buying Guide

What’s Next For The Fed- No Exit

Wall Street Journal 2009- The Fed’s Exit Strategy

The Dark Side of Artificially Low Interest Rates

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