A Plutonomy world – we just live in it

PLUTONOMY is a word coined five or so years ago by Ajay Kapur, then a global strategist at Citigroup, to describe the United States economy.  It is a kinder, gentler synonym for plutocracy or oligarchy.  It means an economic system based on serving the needs and desires of the ultra-rich.

In the United States, 1 percent of the population has wealth equivalent to the bottom 90 percent.  And, according to Kapur, their share of the national wealth is likely to continue to increase.

Ajay Kapur

One implication of this fact is that it makes more sense for business to make products for the ultra-rich than for the mass public. He recommended a Plutonomy investment portfolio, in stocks of Tiffany’s, Sotheby’s, Burberry, the Four Seasons and other companies that cater to the wealthy elite.

Another is that many of the problems that affect the general public – for example, rising gasoline and food prices – do not affect the Plutonomy.  That means little is likely to be done about these problems.

After Michael Moore cited Kapur in his documentary movie, “Capitalism: a Love Story,” his writings were taken down from the Internet.  But earlier this year Kapur, who now is head of Asian equity strategy for Deutsche Bank, resurfaced with an interview by Robert Frank of the Wall Street Journal.

Kapur said the Plutonomy is alive and well, and is so well entrenched it is unlikely to go away anytime soon.  In fact, he now sees the whole world, not just the United States, as a Plutonomy.

The foundation of Plutonomy is deregulation and low taxes, Kapur said, and the Plutonomy is so politically powerful that it can resist populist pressures for the indefinite future.

Unlike me, he has no problem with this.  He sees the desire to join the Plutonomy as the driving force of progress.  And as for an economy in which most people work to serve the desires and interests of the rich, he has made a good career doing just that.

Here is the complete 2011 interview by Robert Frank of the Journal’s Wealth Report.

Wealth Report: What is the state of the Plutonomy after the global financial crisis?  Ajay Kapur: One of the risks to the Plutonomy that I highlighted in that earlier research was a financial crisis. I wasn’t expecting a financial crisis, but it was one of the things I noted that could lead to the Plutonomy being challenged.  Well, the financial crisis came and went, and the Plutonomy has survived intact and probably even gotten stronger.  That fascinates me given the serious threats that it faced.

WR: Why did it fare so well?  Mr. Kapur: I think the Plutonomy has built upon itself and it has deep roots now.  One of the main reasons you get a Plutonomy is you have capital-friendly governments and I think that is still in place.  Across the political spectrum is it very tough to destabilize or reverse the nexus of the plutonomists and politicians and policy makers.  Normally, there is a very tight correlation between deregulation and a Plutonomy.  You had periods of deregulation in the 1920s and in the 1980s and those created plutonomies.  We’ve now had financial reform, but I don’t think it’s enough to reverse the course of such a financialized economy.

WR: What stocks should people buy to profit from the Plutonomy?  Should investors be buying Plutonomy stocks in Asia instead of the U.S.?  Mr. Kapur: My global Plutonomy basket has almost tripled off its lows. In Asia, there are some luxury hotels and luxury-car retailers and distributors and watch retailers, but those stocks have already done very well, they’re up more than four times from their lows. I would focus on the more well-known global brands.

WR: But aren’t luxury stocks and Plutonomy stocks far more volatile than the broader stock market?  Mr. Kapur: Yes, of course. That’s because the volatility of the earnings stream for these companies is much higher than the average retailer or average Dow Jones Average company.  Most people need to buy toothpaste or broccoli or daily needs, while plutonomists may get a lower bonus one year and decide not to buy a Plutonomy item.  Plutonomist consumption is almost 10 times as volatile that of the average consumer.

WR: If the spending of the wealthy is 10 times more volatile than the average, and our economy is dominated by spending of the rich, aren’t we headed for more booms and busts caused by the Plutonomy?   Mr. Kapur: Yes, by definition. If plutonomists dominate consumption and incomes, the rest of the economy will become more volatile.

WR: What are the political implications of a rising Plutonomy today?   Mr. Kapur: We have an economy today where a large fraction of the population doesn’t pay federal income taxes and, because of demand for entitlements, we have a system of massive representation without taxation.  On the other hand, you have plutonomists who protect their turf and the taxation amounts are not enough to pay for everyone’s demand.  So I’ve come to the conclusion that budget deficits are biased toward getting bigger and bigger.  Budget deficits are going to become a manifestation of a Plutonomy.

WR: Are there any other political implications?   Mr. Kapur: Well, with plutonomists in emerging markets…you have these huge economic developments, and there are certain folks who are risk-takers or entrepreneurs, who are in the midst of all this complexity and change, who will benefit quite substantially from that growth. I don’t know how anyone can reverse that.  I don’t know whether you would want to reverse this process since the prospects of becoming a plutonomist drives the risk-taking.

via The Wealth Report – WSJ.

Click on Plutonomics for Robert Frank’s original 2006 article on Ajay Kapur’s Plutonomy report.

[Update 5/6/12]

Click on Revisiting Plutonomy: the Rich Getting Richer for a PDF of Ajay Kapur’s March 5, 2006 Plutonomy report.

Click on The Plutonomy Symposium — Rising Tides Lifting Yachts for a PDF of Ajay Kapur’s Sept. 26, 2009 Plutonomy report.

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