America: A Bona Fide Plutonomy

Surfing around this weekend I happened upon some review's of Michael Moore's "Capitalism: A Love Story". Reading some of the UK paper's view of the movie, I saw an interesting reference to an internal 2006 Citigroup memo regarding "America, which has turned into a modern day plutonomy". With the wonders of the internets (sic) I was able to unearth at least part of the report, which frankly pretty much reinforces things that are plainly obvious.

In a "plutonomy", according to Citigroup global strategist Ajay Kapur, economic growth is powered by and largely consumed by the wealthy few.

If this wealth concentration in a democracy is good, bad, or indifferent is the subject for an entirely different blog but that's neither here or there right now.

According to new Internal Revenue Service data announced last week, income inequality in the U.S. is at its worst since the 1920s (before the Great Depression). The top percentile of wealthy Americans earned 21.2% of all income in 2005, up from 19% in 2004, while the bottom 50% of wage earners earned 12.8% that year, down from 13.4% a year earlier.

More interesting are what the views are from within investment banking circles on why the economy acts differently than it used to as wealth is concentrated in a level seen in the States similar to only the 1920s. Below is at least part of the report; a quite fascinating read. An entry in the Wall Street Journal Blog section from January 2007 does a quick summary of the report's findings/opinion. I vaguely remember reading about this at the time, but now in retrospect - after what has happened in the financial system - it is interesting from a totally different prism.

[sidenote: 1 bit of humor - Citigroup listed "financial crisis" as one of the threats to the plutonomy status quo. Oh, irony.]

Now that it has become clear that unlike the 1930s where this historic concentration of wealth was reversed for a good 4 decades post-crisis, this time around, a financial crisis is actually serving to concentrate wealth even further, it might be helpful to readers to see how the entrenched money thinks on how to benefit from it. Basically the same way you'd invest in feudal Europe in the 1400s - avoid the peasants, stick with the lords. I don't see this changing anytime soon; as I said in 2007, in time you will not want to have anything to do with the bottom 80% of the country; it won't be a fun place to be. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] I think in the nearly 2 years since written, the fissures I spoke about have already begun to widen considerably.

Citigroup Mar 5 2006 Plutonomy Report Part 2

Comments

[jeffgroove:]

I can sum up this article extremely quick without much reading.

When baby boomers don't like the rules that are presented, create new ones and invalidate the old ones to benefit you, thats it! Has anyone thought of the number of times Hank Paulson changed the rules of the game last year? Enough said.

Sep 08 04:29 PM

[TinyTim:]

Leave it to Citigroup to screw up the trivia.
Plutonomy is the study of plutocracy, which is the form of government we're all referring to here.

Plutarch on plutocracy, over 2,000 years ago: “An imbalance between rich and poor is the oldest and most fatal ailment of all Republics”.

Sep 08 04:50 PM

[drewriders:]

So I guess, in your view, a free economy with no taxes would be a utopian society?

Are you naive enough to believe concentration of wealth would diminish if this happened?

Low taxes are not a panacea for everything. Like in sports there have to be rules to the game which are fair to EVERYONE not just favor those with the most resources.

On Sep 08 09:36 AM Tony Petroski wrote:

> Mr. Mark is at it again. Plutonomy, plutocracy, whatever. We all
> know when we get these "the rich get richer and the poor get poorer"
> articles that we are going to get a cheap shot at the "rich" and
> a call to "spread the wealth around." Thankfully Trader Mark saved
> us from yet another Robin Hood article.
>
> 1) These quintiles are not fixed. People move in and out of them
> quite freely. I personally went from "rich" (top quintile) to "poor,"
> under the poverty line) in one year. I future years I plan to move
> from the bottom to the top in one year. The misleading part of these
> types of discussions is to imply that there is one group, perhaps
> forming a "plutocracy," plotting via e-mail to run the economy for
> their own benefit at the expense of everyone else.
>
> 2) The coming crisis is not that "the rich get richer and the poor
> get poorer" but that increasingly, a smaller percentage of the population
> pays all the bills while a rising percentage pays no taxes at all
> and/or receive government subsidies. This means that there is emerging
> a permanent majority of voters who will cement in our Eurostasis.
>
>
> 3) If we have a plutocracy, it's not the Citigroup plotters. Whatever
> you may say about their wealth, bonuses, jets, whatever, they suffered
> a big hit in the last go-around, millions of dollars of wealth went
> up in smoke causing real losses even if the little guy will shed
> no tears, nor should he. The little guy lost no wealth because he
> didn't have any. The real plutocracy is the tight and cozy group
> that run the country, politicians, primarily Democratic ones. They
> shift in and out from "public service" where they have the benefits
> of great power, to "private service" where they make millions of
> dollars at the likes of Fannie Mae, Goldman Sachs and other connected
> organizations, their chief function being to wait for the next crack
> at power and to provide political cover for their private organizations.
>
>
> 4) If this alleged problem highlighted by Mr. Mark is amenable to
> a government fix, why hasn't this happened yet? After all, there
> are plenty of pitchfork-wielding citizens willing to toss the ropes
> around Gulliver and pin him to the ground. After a century of such
> action, why no improvement?
>
> 5) It's because efforts to hem in "the rich" generally result in
> a cementing-in of the status quo. Those already rich and firmly
> a part of the plutocracy, one thinks of Ted Kennedy, John Kerry or
> Jay Rockefeller, have their pile. In order to get a pile, you need
> a high income. The plutocracy places high taxes on the up-an-comers,
> those who would become the rich for the next ten or twenty years,
> and squashed both their movement and the economic benefits that such
> risk-takes would bring to the economy, while creating political structures
> allowing themselves to rule forever.
>
> Bottom line: A free economy with low taxation on everyone is the
> best way to shake up any plutocracy, not the Eurostagnation we are
> about to put permanently in place here in America.
>

Sep 08 05:06 PM

[Angry Banker:]

So what if the rich get richer? America's middle class has one of the highest quality standards of living in the world. Just because the middle class is not "rich," (or that the rich are not becoming poorer), does not mean the American middle class is suffering.

Sep 08 05:23 PM

[TraderMark:]

That is a debatable subject. The general throwaway line is the middle class is better off or has the highest quality standard of living because of the most toys.

One could make many arguments against it -
is a situation where getting sick at the wrong time (no insurance) or with too little insurance, a good standard? i.e. your entire life savings can be wiped out by one stay in the hospital? is that a better situation than other countries?

is a situation where to maintain the place in society as middle class, both parents have to work rather than the old standard where only the male had to (say 1950s, 1960s) "better"? Yes more toys now but what has it done for family and society?

the previous example compared "today" to 50 years ago. What about versus 10 years ago? Do you honestly believe if you talk to the average Joe he feels he is better off than 10 years ago?

Now let's be clear many average Joes got themselves in a serious pickle by spending far more than they have. But many others are just struggling to get by even by following the rules.

I hang out in the middle class and maybe I'm on the wrong side of the tracks or live in the wrong state but many believe their kids won't have a chance to repeat the standard of living they did. And those are coming from people who are working 2-3 jobs to provide as much as their parents did with 1 job.

Argument is not that the middle class deserve to be rich - the larger question that needs to be asked is what % of the population is going backwards or having to do 2-3x as much as in the past simply to stay in the same place. While a small sliver prosper no matter what.


On Sep 08 05:23 PM Angry Banker wrote:

> So what if the rich get richer? America's middle class has one of
> the highest quality standards of living in the world. Just because
> the middle class is not "rich," (or that the rich are not becoming
> poorer), does not mean the American middle class is suffering.

Sep 08 05:48 PM

[Pat C:]

Great article and commentary.

Sep 08 06:19 PM

[Sober Realist:]

What nimrod gave you a negative on that remark? -- Obviously one of the Plutocracy which enjoys socialism for the rich subsidized off the backs of the middle class, i.e. Too-Big-To-Fail Bail-Outs.
Speaking of healthcare, here's a great trip down memory lane:
Hospital fees now 400 (to 800) times the cost in 1934
www.mountvernonnews.co...


On Sep 08 05:48 PM TraderMark wrote:

> That is a debatable subject. The general throwaway line is the middle
> class is better off or has the highest quality standard of living
> because of the most toys.
>
> One could make many arguments against it -
> is a situation where getting sick at the wrong time (no insurance)
> or with too little insurance, a good standard? i.e. your entire
> life savings can be wiped out by one stay in the hospital? is that
> a better situation than other countries?
>
> is a situation where to maintain the place in society as middle class,
> both parents have to work rather than the old standard where only
> the male had to (say 1950s, 1960s) "better"? Yes more toys now but
> what has it done for family and society?
>
> the previous example compared "today" to 50 years ago. What about
> versus 10 years ago? Do you honestly believe if you talk to the
> average Joe he feels he is better off than 10 years ago?
>
> Now let's be clear many average Joes got themselves in a serious
> pickle by spending far more than they have. But many others are
> just struggling to get by even by following the rules.
>
> I hang out in the middle class and maybe I'm on the wrong side of
> the tracks or live in the wrong state but many believe their kids
> won't have a chance to repeat the standard of living they did. And
> those are coming from people who are working 2-3 jobs to provide
> as much as their parents did with 1 job.
>
> Argument is not that the middle class deserve to be rich - the larger
> question that needs to be asked is what % of the population is going
> backwards or having to do 2-3x as much as in the past simply to stay
> in the same place. While a small sliver prosper no matter what.
>

Sep 08 08:41 PM

[mbkelly75:]

I bought my first dividend-paying stocks while still a pre-teen from money I made mowing lawns over 50 years ago.....from that start, my portfolios are approaching 9 figures. The problem is not (and never has been) the rich getting richer and the poor getting poorer. It is simply that the poor have NEVER learned how to become rich. The information (education) has been out there for decades for anyone who looked for it. It is MUCH easier now to trade stocks and bonds using the Internet than it was when I started out. The education is easier to get from sites like SA or even MSN. It is not rocket science and anyone who wishes to can learn. Instead of complaining and holding your hand out - learn to do it for yourself - instead of trying to tear down someone else - learn from them - and take the time to become rich yourself. Instead of trying to beat them up - study, learn, apply the knowledge as not much happens without taking action, and become rich yourself. Do not try to beat them - learn to join them.

Sep 08 10:58 PM

[untrusting ...:]

Mark,
If you just talk about Federal income tax ... that is but a small part of the taxes paid by everyone. There is also state tax, payroll taxes, property taxes, sales taxes, etc. Payroll taxes are the big burden of the working class now not Federal income tax.

But the main point is that, for the average worker ... by the time you take into account federal taxes, state taxes, and payroll taxes the average worker pays a far greater percentage of their income to taxes than does the wealthy income earner. This is because of a variety of factors such as caps on payroll taxes for the wealthy. The wealthy pay a much smaller percentage of payroll taxes on far higher incomes. In additon, the wealthy make hugh amounts of their income from tax advantaged sources such as captial gains, stock options, tax exempt bonds, etc. A relatively small amount of the wealthy incomes derives from "wages and salaries". The above is why Warren Buffett makes the claim that "effectively" he pays less tax as a proportion of his income than his secretary does.

Further, if one compares Federal income tax rates from say 1900-2009, it is very clear that top bracket rates have dropped very significantly for the top 1%. All one needs to do to verify this is do a Google search for historic tax rates and compare the rates. There was a dramatic decrease for the wealthy in about 1980 and they have rapidly been adding to their relative wealth ever since then.

Same thing for corporate income taxes. Corporate taxes have dramatically decreased in relation to total Federal taxes over the past decade or two.

But the most important point of all probably is not even the relative unfairness of the system or even the inequality of income and wealth. Most Americans do not begrudge the wealthy their wealth if in fact they EARNED it legitimately such as by innovation, hard work, creativitivity, special performance, etc. And this does happen some of the time For example an Oprah Winfrey or a Warren Buffett or even a star athlete or star entertainer. But what annoys most Americans is that hugh numbers of the wealthy did not really earn it legitimately .. in effect they gamed the system, used fraud, misrepresentation, lobbying, and multiple other unethical methods to acquire their wealth. For example, look at our titans of public companies that have paid themselves hundreds of billions in compensation, bonuses, stock options, etc over the past decade. And they attempt to justify if based on performance. What performance --- negative returns over the past decade. In effect they stole it from the stockholders and worldwide investors because they controlled the system, and the boards, and the means of setting compensation within the wealthy elite.


On Sep 08 03:40 PM TraderMark wrote:

> Matt, all true on the taxes
>
> The reality is there is not enough left to tax to pay for spending.
> There is only so much income earned each year in the country and
> we're going to approach the point where it's going to get stifling.
> With a median income of $36K, I don't see what more you can squeeze
> out of the "bottom half" (making $22, 25, 28, 32K). I mean if you
> raise their tax rates up 5% whats it going to generate in the big
> scheme of things? The cost of a few more figher jets?
>
> Carter years were before my time as an adult but I think I read when
> Reagan came in the top level taxes were well in excess of 50%, but
> I think income distribution was flatter back then.
>
> Anyhow no easy answers - I think the issue with America is not as
> much income distribution as wealth concentration. Wealth concentration
> is the buildup of annualized income distribution. One could argue
> as one goes to the grave one should keep all their toys for multiple
> generations but I am not sure what benefit having Paris Hilton prosper
> off the work of her parents and grandparents is, inside a society.
> Warren Buffet (based on what he plans to give to his kids) seems
> to think otherwise.
>
> The problem is, any taxation on estates will simply go back into
> the government coffers at which point it will be wasted yet again.
> Maybe we need profit seeking competitive businesses that spend accumulated
> wealth upon death over some amount - say over $500 million. I assume
> $500 million is a good level for a spouse and kids to live off on
> for a generation or two. ;)
>
> Ah but if one cannot leave more than $500 million to heirs no one
> will be motivated to work. Nevermind ;)

Sep 09 12:19 AM

[H. T. Love:]

Two good notesrelate to the topic at hand.

seekingalpha.com/autho...

seekingalpha.com/artic...

HardToLove

Sep 09 06:14 AM

[TraderMark:]

I agree with that comment whole heartedly. Much of the system has become "heads we win, tails we win" - at least in our public corporations and the feeding troughs they have become to a select few is a very big issue which apparently is going to be ignored now that the market is going in the "right direction"


On Sep 09 12:19 AM untrusting investor wrote:

> Most Americans do not begrudge the wealthy their wealth if in fact they EARNED it legitimately such as by innovation, hard work, creativitivity, special performance, etc.

Sep 09 11:52 AM

[TraderMark:]

Look... anyone can have a bad decade ;) ahem.


On Sep 09 12:19 AM untrusting investor wrote:

> For example, look at our titans of public companies that have paid themselves hundreds of billions in compensation, bonuses, stock options, etc over the past decade. And they attempt to justify if based on performance. What performance --- negative returns over the past decade.

Sep 09 11:53 AM

[TraderMark:]

Those were good comments and things I've touched on in various pieces. Which is why the fact those in power want to increase inflation and have passed on the brainwashing that inflation and the loss of purchasing power is a "good thing" is beyond me.

I posted in a deflation piece about a month ago that the British Empire dominated for a good 100 year with many 2-3 periods of inflation, then deflation, than inflation, then deflation.

The reason I think that would be a good situation here is due to the pressure on wages for many in the lower and middle tranches of society. If the powers that be were not insistent on pushing up the costs of everything because "inflation is good" you could do ok on a flattish wage. But those powers want prices to go up, and hence cost of living ever increases, while wages have been pressured.

Hence many have turned to borrowing.

And now here we are, repeating it all over again - but instead of borrowing the government is now giving direct handouts via stimulus, cash for clunkers, housing programs because many people simply cannot keep up on their own.

As long as foreign creditors allow this game can continue - but it will end badly.


On Sep 09 06:14 AM H. T. Love wrote:

> Two good notesrelate to the topic at hand.
>
> seekingalpha.com/autho...;br/>
>
> seekingalpha.com/artic...
>
>
> HardToLove

Sep 09 11:59 AM

[Michael Clark:]

Actually, that money was thrown TO the rich. Remember Mister Paulson on his knees, begging, with a gun in his pocket? I don't think he distributed that money to the poor in New York City.


On Sep 08 12:46 PM Matt Blackman wrote:
But it would seem that the
> rich are better at catching the money being thrown out of Fed Reserve
> and government helicopters....

Sep 09 12:01 PM

[Michael Clark:]

I agree.

We don't hate the rich. We hate people who get rich by playing a fixed game on a fixed field, pretending the game is fair and true.


On Sep 09 11:52 AM TraderMark wrote:

> I agree with that comment whole heartedly. Much of the system has
> become "heads we win, tails we win" - at least in our public corporations
> and the feeding troughs they have become to a select few is a very
> big issue which apparently is going to be ignored now that the market
> is going in the "right direction"

Sep 09 12:09 PM

[Graham and ...:]

The issue is not that the rich are rich. It is that they are doing their best to make the rest of us poor. If they get their way, 'America's middle class has one of the highest quality standards of living in the world.' will no longer be a true statement.


On Sep 08 05:23 PM Angry Banker wrote:

> So what if the rich get richer? America's middle class has one of
> the highest quality standards of living in the world. Just because
> the middle class is not "rich," (or that the rich are not becoming
> poorer), does not mean the American middle class is suffering.

Sep 09 12:11 PM

[Michael Clark:]

The political picture has just begun to change. The next few governments will be increasingly anti-Big Business and increasingly anti-monopolistic. There will be political pressure to get even with the ones who caused our grief. We're like in 1931...a lot of changes are going to happen over the next two decades.


"Now that it has become clear that unlike the 1930s where this historic concentration of wealth was reversed for a good 4 decades post-crisis, this time around, a financial crisis is actually serving to concentrate wealth even further, it might be helpful to readers to see how the entrenched money thinks on how to benefit from it. Basically the same way you'd invest in feudal Europe in the 1400s - avoid the peasants, stick with the lords. I don't see this changing anytime soon; as I said in 2007, in time you will not want to have anything to do with the bottom 80% of the country; it won't be a fun place to be. [Dec 8, 2007: Do the Bottom 80% of Americans Stand a Chance?] I think in the nearly 2 years since written, the fissures I spoke about have already begun to widen considerably."

Sep 09 12:19 PM

[Yohei:]

You write, "..the stimulus money has had a proportionately greater benefit to the wealthy - most certainly an unintended consequence of the Obama plan that is designed to take more from the rich."

I disagree utterly. The very idea that Obama is for the little guy is absurd. You have to evaluate what politicians DO, and pay no attention to what they SAY.

Can you possibly think that Summers, Geithner, et. al. were put into their jobs for any other reason than protecting the very, very rich? Don't let yourself be deluded. The situation is obvious.


On Sep 08 12:46 PM Matt Blackman wrote:

> Interesting point but Michael Moore has yet again done his best to
> suck the public into his truth-distorted sensationalist mockumentary
> world. Those who take him seriously do so at their financial and
> intellectual peril.
>
> But the Citigroup findings do bring up an interesting point. Although
> the top10% income group earned 43% of the total income, in the same
> year (2006) the top 10% paid 70.22% of total taxes in the US and
> this proportion has been steadily rising according to the National
> Taxpayers Union.
>
> Translation? While the percentage income earned by the top brackets
> has been rising, the amount the government claws back through higher
> taxes is rising even faster.
>
> But if the conclusion that the wealthy have done better through this
> meltdown versus the Great Depression is true, it means that all the
> stimulus money has had a proportionately greater benefit to the wealthy
> - most certainly an unintended consequence of the Obama plan that
> is designed to take more from the rich. But it would seem that the
> rich are better at catching the money being thrown out of Fed Reserve
> and government helicopters....

Sep 09 02:51 PM

[Gregman2:]

Plutonomy=Bloviacracy:-)

Sep 09 04:22 PM

[Rotnflesh:]

Honestly, most of what you say is true; however, this is a pyramid scheme we're dealing with:

1. You have local powers dominated by regional powers;

2. You have regional powers dominated by State powers;

3. You have State powers governed in the Congress and by powerful meta-national corporations;

4. You have said State and Corporate powers controlled by banks;

5. You have banks controlled by parent banks (Such as Rothschild Bank, Bank of England, etc) who are promoting a Bank of the World

And, at the very top beyond the national and even international levels (in the recesses of non-nationality) you have the Bilderberg Group. Look to the top, friend; the world is suffering from their monetary policies (e.g., International Monetary Fund), their corporate corruptions (e.g., Blackwater/Halliburton), and their wars instigated by governmental agencies and personages (Like the CIA/Rumsfeld/Bin Laden/Hussein connections)...

The world is a giant orchestration for these people, and we're the players.


On Sep 08 09:36 AM Tony Petroski wrote:

> Mr. Mark is at it again. Plutonomy, plutocracy, whatever. We all
> know when we get these "the rich get richer and the poor get poorer"
> articles that we are going to get a cheap shot at the "rich" and
> a call to "spread the wealth around." Thankfully Trader Mark saved
> us from yet another Robin Hood article.
>
> 1) These quintiles are not fixed. People move in and out of them
> quite freely. I personally went from "rich" (top quintile) to "poor,"
> under the poverty line) in one year. I future years I plan to move
> from the bottom to the top in one year. The misleading part of these
> types of discussions is to imply that there is one group, perhaps
> forming a "plutocracy," plotting via e-mail to run the economy for
> their own benefit at the expense of everyone else.
>
> 2) The coming crisis is not that "the rich get richer and the poor
> get poorer" but that increasingly, a smaller percentage of the population
> pays all the bills while a rising percentage pays no taxes at all
> and/or receive government subsidies. This means that there is emerging
> a permanent majority of voters who will cement in our Eurostasis.
>
>
> 3) If we have a plutocracy, it's not the Citigroup plotters. Whatever
> you may say about their wealth, bonuses, jets, whatever, they suffered
> a big hit in the last go-around, millions of dollars of wealth went
> up in smoke causing real losses even if the little guy will shed
> no tears, nor should he. The little guy lost no wealth because he
> didn't have any. The real plutocracy is the tight and cozy group
> that run the country, politicians, primarily Democratic ones. They
> shift in and out from "public service" where they have the benefits
> of great power, to "private service" where they make millions of
> dollars at the likes of Fannie Mae, Goldman Sachs and other connected
> organizations, their chief function being to wait for the next crack
> at power and to provide political cover for their private organizations.
>
>
> 4) If this alleged problem highlighted by Mr. Mark is amenable to
> a government fix, why hasn't this happened yet? After all, there
> are plenty of pitchfork-wielding citizens willing to toss the ropes
> around Gulliver and pin him to the ground. After a century of such
> action, why no improvement?
>
> 5) It's because efforts to hem in "the rich" generally result in
> a cementing-in of the status quo. Those already rich and firmly
> a part of the plutocracy, one thinks of Ted Kennedy, John Kerry or
> Jay Rockefeller, have their pile. In order to get a pile, you need
> a high income. The plutocracy places high taxes on the up-an-comers,
> those who would become the rich for the next ten or twenty years,
> and squashed both their movement and the economic benefits that such
> risk-takes would bring to the economy, while creating political structures
> allowing themselves to rule forever.
>
> Bottom line: A free economy with low taxation on everyone is the
> best way to shake up any plutocracy, not the Eurostagnation we are
> about to put permanently in place here in America.
>

Sep 22 11:41 PM