If you haven’t already read it, you might want to celebrate this Labor Day by reading Citigroup’s infamous 2005 Plutonomy memos, in which they advise investors that America is no longer a democracy as much as it is a plutonomy in which “economic growth is powered by and largely consumed by the wealthy few.”
At the heart of plutonomy, is income inequality. Societies that are willing to tolerate/endorse income inequality, are willing to tolerate/endorse plutonomy.
That pretty much describes the United States in the 21st century. The rich continue to get richer, consuming a larger and larger chunk of the GDP, as wages for working and middle class families continue to stagnate or drop, largely due to the global labor pool keeping wage inflation in check, and profits rising. And according to Citi, it’s only getting worse (or in their eyes, better).
But it’s not inevitable.
RISKS — WHAT COULD GO WRONG?
Our whole plutonomy thesis is based on the idea that the rich will keep getting richer. This thesis is not without its risks. For example, a policy error leading to asset deflation, would likely damage plutonomy. Furthermore, the rising wealth gap between the rich and poor will probably at some point lead to a political backlash. Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfranchisement remains as was – one person, one vote (in the plutonomies). At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation (on the rich or indirectly though higher corporate taxes/regulation) or through trying to protect indigenous laborers, in a push-back on globalization – either anti-immigration, or protectionism. We don’t see this happening yet, though there are signs of rising political tensions. However we are keeping a close eye on developments.
“One person, one vote.” That’s what the very wealthy fear most… that one day “labor will fight back” against the growing economic imbalance that is destroying our nation for the other 99% of us. Chew on that as you’re enjoying your Labor Day BBQ.