Citibank analysts have invented a new word - plutonomy.
This is how they define it;
"There are certain economies, driven by massive income and wealth inequality – plutonomies – where the rich are so rich that their behavior – be it negative savings, or just very low consumption of oil as a percentage of their income overwhelms that of the “average” or median consumer."
In other words, a plutonomy is an economy where only the rich matter. The average consumer is simply "overwhelmed". Who are the plutomonies - the US, Australia, Canada and of course, the UK.
Citibank cite three reasons for the emergence of the plutonomies; asset price inflation, the rise of managerial capitalism, and technological change leading to the creation of a new class of high net worth individuals. Twenty years of tax breaks for the rich, coupled with sophisticated tax avoidance arrangements, it seems, played no role in this happy state of affairs.
As Citibank casually point out:
"As the rich having been getting richer over the last 20 years or so – both in terms of their share of income and wealth – so too businesses that have been servicing the rich or selling to them have enjoyed a favorable operating backdrop."
And the implication for investors?
"We should worry less about what the average consumer – say the 50th percentile – is going to do, when that consumer is (we think) less relevant to the aggregate data than how the wealthy feel and what they are doing. This is simply a case of mathematics, not morality.
There is no right or wrong. It is all numbers. There are no value judgements. There are rich people and irrelevant serfs. What does the future hold for the plutonomies? There is good news and bad news. Lets serve of the good bit first:
"the plutonomists are likely to get even richer over the coming years."
However, there are risks. First, there is the danger of financial collapse:
"As much of the wealth of the plutonomists is held in one shape or other in financial wealth (as opposed to land or property), the state of the financial system is important. Financial collapse, as in the Great Depression in the US, would be a serious challenge to the plutonomists."
And there was I thinking that a financial crisis was a bad thing. However, there is more bad news.
"Perhaps the most immediate challenge to Plutonomy comes from the political process. Ultimately, the rise in income and wealth inequality to some extent is an economic disenfranchisement of the masses to the benefit of the few. However in democracies this is rarely tolerated forever.
We see the biggest threat to plutonomy as coming from a rise in political demands to reduce income inequality, spread the wealth more evenly, and challenge forces such as globalization which have benefited profit and wealth growth.
Reactionary political forces are likely to rise as globalization persists and the losers in developed economies gain in numbers. To an extent we see this happening in Europe, for example, where the rise in the profit share (fall in the wage share) has come at the same time as the rise of right-wing, generally anti-immigration parties. "
Up is down; left is right. A reactionary is someone who wants a fairer society. To oppose a fall in the wage share is to be anti-immigrant and implicitly racist.
Reading this memo, I can't help sensing that the authors are just being provocative. Is the world really this way? Or are they just trying to amuse us?