The Potemkin Syndrome

In  the 18th Century, a Russian aristocrat was credited with constructing false villages along the Dnieper River in order to deceive Catherine II as to the true nature of the economic despair prevalent in his domain. As the story goes, Catherine was on a barge, inspecting the economic conditions of the Crimea. Grigory  Potemkin the appointed ruler of this area, named “New Russia” had a mobile village constructed. He populated the village with political loyalists, dressed as peasants. They would stand on the banks of the river and wave at Catherine when she passed by, then rush downriver under cover of darkness and reconstruct the facades for Catherine’s view on the next leg of her journey.

According to legend, Catherine was so impressed by this ‘unbelievable economic’ revival she promoted Potemkin to lead the Russian Army in their conflict with the Turks. The facades were destroyed and the poverty and misery of “New Russia” continued because Catherine believed there was no need for economic assistance to this prosperous region.

Today we are inside of the Potemkin Syndrome. 

We see a stock market that continues to rise. Those of us who watch the financial shows hear only good news. We are told ‘invest here’, invest there’, ‘buy this stock’ , ‘sell that stock’. Movie Actors tell us to call expensive brokerage houses and invest!, invest! invest! I’m not against investing. What I am against is the mentality that buys the Potemkin Facade and not the consideration of the tremendous risk retirees and pre-retirees are taking in their portfolios. It is conceivable that many people have  forgotten 1999, 2001 and 2008. In each of those experiences we were able to see behind the Potemkin Facades of Wall Street. Then as our economic barge moved past the discomfort of losses, investors forgot that sinking feeling. In many cases, this willful blindness to unnecessary risk with funds we CANNOT lose is a serious threat to our society.

Take for instance, our National Debt. The OPERATING DEBT is at 18 TRILLION and climbing. The unfunded  liability debt is over 100 Trillion. Wall Street is still obtaining 87 BILLION a month in government largess, opaquely titled ‘Quantitative Easing’. This irresponsible monetizing of our debt is now being copied in the European Union. When out of money, what the heck, PRINT IT!!!!

Yet our Potemkin inspired economic ‘guru’s’ tell us ‘all is well’, keep buying those European Stocks, and Invest in banks. I  can watch hours of Financial Programs on the alphabet of cable channels. You never hear a discussion of reigning in government spending, ceasing the debasement of the currency, and addressing our debt and deficits. The Facades get a new coat of paint. The foundation rots. The Aristocrats go to the bank with their largess infused wealth. 

I meet with retirees and pre-retirees. That is my practice. When I address risk management they bob their heads, acknowledge they don’t want to lose any money, and they want lifetime income. In far too many I see the light go on, the wheels turn, and then stop. One person told me that ‘yes, they had lost 30% in 2008, but their advisor had made them money since then, and they could not possibly change.’ Upon further probing, they said ‘he’s done fantastic for us, except 1999, 2001 and 2008’.

I just saw the Facades of their Potemkin Village move further down the river.

Each time we go through this, I get a little more concerned. Too many good people have built a Potemkin Village. The government is not going to bail them out. If the talking heads are wrong, it isn’t their 2nd house in the Hamptons that will be lost. It will be an un-anticipated impoverishment of retirees that will lose their dreams of security.


Sail on, Catherine. 


March 13th, 2015 by Scheiber & Associates