RISING TIDES LIFT ALL YACHTS
REVOLT of the RICH
Our financial elites are the new secessionists
by Mike Lofgren / August 27, 2012
It was 1993, during congressional debate over the North American Free Trade Agreement. I was having lunch with a staffer for one of the rare Republican congressmen who opposed the policy of so-called free trade. To this day, I remember something my colleague said: “The rich elites of this country have far more in common with their counterparts in London, Paris, and Tokyo than with their fellow American citizens.” That was only the beginning of the period when the realities of outsourced manufacturing, financialization of the economy, and growing income disparity started to seep into the public consciousness, so at the time it seemed like a striking and novel statement.
At the end of the Cold War many writers predicted the decline of the traditional nation-state. Some looked at the demise of the Soviet Union and foresaw the territorial state breaking up into statelets of different ethnic, religious, or economic compositions. This happened in the Balkans, the former Czechoslovakia, and Sudan. Others predicted a weakening of the state due to the rise of Fourth Generation warfare and the inability of national armies to adapt to it. The quagmires of Iraq and Afghanistan lend credence to that theory. There have been numerous books about globalization and how it would eliminate borders. But I am unaware of a well-developed theory from that time about how the super-rich and the corporations they run would secede from the nation state. I do not mean secession by physical withdrawal from the territory of the state, although that happens from time to time—for example, Erik Prince, who was born into a fortune, is related to the even bigger Amway fortune, and made yet another fortune as CEO of the mercenary-for-hire firm Blackwater, moved his company (renamed Xe) to the United Arab Emirates in 2011. What I mean by secession is a withdrawal into enclaves, an internal immigration, whereby the rich disconnect themselves from the civic life of the nation and from any concern about its well being except as a place to extract loot.
Our plutocracy now lives like the British in colonial India: in the place and ruling it, but not of it. If one can afford private security, public safety is of no concern; if one owns a Gulfstream jet, crumbling bridges cause less apprehension—and viable public transportation doesn’t even show up on the radar screen. With private doctors on call and a chartered plane to get to the Mayo Clinic, why worry about Medicare? Being in the country but not of it is what gives the contemporary American super-rich their quality of being abstracted and clueless. Perhaps that explains why Mitt Romney’s regular-guy anecdotes always seem a bit strained. I discussed this with a radio host who recounted a story about Robert Rubin, former secretary of the Treasury as well as an executive at Goldman Sachs and CitiGroup. Rubin was being chauffeured through Manhattan to reach some event whose attendees consisted of the Great and the Good such as himself. Along the way he encountered a traffic jam, and on arriving to his event—late—he complained to a city functionary with the power to look into it. “Where was the jam?” asked the functionary. Rubin, who had lived most of his life in Manhattan, a place of east-west numbered streets and north-south avenues, couldn’t tell him. The super-rich who determine our political arrangements apparently inhabit another, more refined dimension. To some degree the rich have always secluded themselves from the gaze of the common herd; their habit for centuries has been to send their offspring to private schools. But now this habit is exacerbated by the plutocracy’s palpable animosity towards public education and public educators, as Michael Bloomberg has demonstrated. To the extent public education “reform” is popular among billionaires and their tax-exempt foundations, one suspects it is as a lever to divert the more than $500 billion dollars in annual federal, state, and local education funding into private hands—meaning themselves and their friends. What Halliburton did for U.S. Army logistics, school privatizers will do for public education. A century ago, at least we got some attractive public libraries out of Andrew Carnegie. Noblesse oblige like Carnegie’s is presently lacking among our seceding plutocracy. In both world wars, even a Harvard man or a New York socialite might know the weight of an army pack. Now the military is for suckers from the laboring classes whose subprime mortgages you just sliced into CDOs and sold to gullible investors in order to buy your second Bentley or rustle up the cash to get Rod Stewart to perform at your birthday party. The sentiment among the super-rich towards the rest of America is often one of contempt rather than noblesse.
Stephen Schwarzman, the hedge fund billionaire CEO of the Blackstone Group who hired Rod Stewart for his $5-million birthday party, believes it is the rabble who are socially irresponsible. Speaking about low-income citizens who pay no income tax, he says: “You have to have skin in the game. I’m not saying how much people should do. But we should all be part of the system.” But millions of Americans who do not pay federal income taxes do pay federal payroll taxes. These taxes are regressive, and the dirty little secret is that over the last several decades they have made up a greater and greater share of federal revenues. In 1950, payroll and other federal retirement contributions constituted 10.9 percent of all federal revenues. By 2007, the last “normal” economic year before federal revenues began falling, they made up 33.9 percent. By contrast, corporate income taxes were 26.4 percent of federal revenues in 1950. By 2007 they had fallen to 14.4 percent. So who has skin in the game? While there is plenty to criticize the incumbent president for, notably his broadening and deepening of President George W. Bush’s extra-constitutional surveillance state, under President Obama the overall federal tax burden has not been raised, it has been lowered. Approximately half the deficit impact of the stimulus bill was the result of tax-cut provisions. The temporary payroll-tax cut and other miscellaneous tax-cut provisions make up the rest of the cuts we have seen in the last three and a half years. Yet for the president’s heresy of advocating that billionaires who receive the bulk of their income from capital gains should pay taxes at the same rate as the rest of us, Schwarzman said this about Obama: “It’s a war. It’s like when Hitler invaded Poland in 1939.” For a hedge-fund billionaire to defend his extraordinary tax privileges vis-à-vis the rest of the citizenry in such a manner shows an extraordinary capacity to be out-of-touch. He lives in a world apart, psychologically as well as in the flesh.
Schwarzman benefits from the so-called “carried interest rule” loophole: financial sharks typically take their compensation in the form of capital gains rather than salaries, thus knocking down their income-tax rate from 35 percent to 15 percent. But that’s not the only way Mr. Skin-in-the-Game benefits: the 6.2 percent Social Security tax and the 1.45 percent Medicare tax apply only to wages and salaries, not capital gains distributions. Accordingly, Schwarzman is stiffing the system in two ways: not only is his income-tax rate less than half the top marginal rate, he is shorting the Social Security system that others of his billionaire colleagues like Pete Peterson say is unsustainable and needs to be cut. This lack of skin in the game may explain why Romney has been so coy about releasing his income-tax returns. It would make sense for someone with $264 million in net worth to joke that he is “unemployed”—as if he were some jobless sheet metal worker in Youngstown—if he were really saying in code that his income stream is not a salary subject to payroll deduction. His effective rate for federal taxes, at 14 percent, is lower than that of many a wage slave. After the biggest financial meltdown in 80 years and a consequent long, steep drop in the American standard of living, who is the nominee for one of the only two parties allowed to be competitive in American politics? None other than Mitt Romney, the man who says corporations are people. Opposing him will be the incumbent president, who will raise up to a billion dollars to compete. Much of that loot will come from the same corporations, hedge-fund managers, merger-and-acquisition specialists, and leveraged-buyout artists the president will denounce in pro forma fashion.
The super-rich have seceded from America even as their grip on its control mechanisms has tightened. But how did this evolve historically, what does it mean for the rest of us, and where is it likely to be going? That wealth-worship—and a consequent special status for the wealthy as a kind of clerisy—should have arisen in the United States is hardly surprising, given the peculiar sort of Protestantism that was planted here from the British Isles. Starting with the Puritanism of New England, there has been a long and intimate connection between the sanctification of wealth and America’s economic and social relationships. The rich are a class apart because they are the elect. Most present-day Americans, if they think about the historical roots of our wealth-worship at all, will say something about free markets, rugged individualism, and the Horatio Alger myth—all in a purely secular context. But perhaps the most notable 19th-century exponent of wealth as virtue and poverty as the mark of Cain was Russell Herman Conwell, a canny Baptist minister, founder of perhaps the first tabernacle large enough that it could later be called a megachurch, and author of the immensely famous “Acres of Diamonds” speech of 1890 that would make him a rich man. This is what he said:
I say that you ought to get rich, and it is your duty to get rich. … The men who get rich may be the most honest men you find in the community. Let me say here clearly … ninety-eight out of one hundred of the rich men of America are honest. That is why they are rich. That is why they are trusted with money. … I sympathize with the poor, but the number of poor who are to be sympathized with is very small. To sympathize with a man whom God has punished for his sins … is to do wrong … let us remember there is not a poor person in the United States who was not made poor by his own shortcomings.
Evidently Conwell was made of sterner stuff than the sob-sister moralizing in the Sermon on the Mount. Somewhat discordantly, though, Conwell had been drummed out of the military during the Civil War for deserting his post. For Conwell, as for the modern tax-avoiding expat billionaire, the dollar sign tends to trump Old Glory. The conjoining of wealth, Christian morality, and the American way of life reached an apotheosis in Bruce Barton’s 1925 book The Man Nobody Knows. The son of a Congregationalist minister, Barton, who was an advertising executive, depicted Jesus as a successful salesman, publicist, and the very role model of the modern businessman.
But this peculiarly American creed took a severe hit after the crash of 1929, and wealth ceased to be equated with godliness. While the number of Wall Street suicides has been exaggerated in national memory, Jesse Livermore, perhaps the most famous of the Wall Street speculators, shot himself, and so did several others of his profession. There was then still a lingering old-fashioned sense of shame now generally absent from the über-rich. While many of the elites hated Franklin Roosevelt—consider the famous New Yorker cartoon wherein the rich socialite tells her companions, “Come along. We’re going to the Trans-Lux to hiss Roosevelt”—most had the wit to make a calculated bet that they would have to give a little of their wealth, power, and prestige to retain the rest, particularly with the collapsing parliamentary systems of contemporary Europe in mind. Even a bootlegging brigand like Joe Kennedy Sr. reconciled himself to the New Deal. And so it lasted for a generation: the wealthy could get more wealth—fabulous fortunes were made in World War II; think of Henry J. Kaiser—but they were subject to a windfall-profits tax. And tycoons like Kaiser constructed the Hoover Dam and liberty ships rather than the synthetic CDOs that precipitated the latest economic collapse. In the 1950s, many Republicans pressed Eisenhower to lower the prevailing 91 percent top marginal income tax rate, but citing his concerns about the deficit, he refused. In view of our present $15 trillion gross national debt, Ike was right. Characteristic of the era was the widely misquoted and misunderstood statement of General Motors CEO and Secretary of Defense Charles E. “Engine Charlie” Wilson, who said he believed “what was good for the country was good for General Motors, and vice versa.” He expressed, however clumsily, the view that the fates of corporations and the citizenry were conjoined. It is a view a world away from the present regime of downsizing, offshoring, profits without production, and financialization. The now-prevailing Milton Friedmanite economic dogma holds that a corporation that acts responsibly to the community is irresponsible. Yet somehow in the 1950s the country eked out higher average GDP growth rates than those we have experienced in the last dozen years.
After the 2008 collapse, the worst since the Great Depression, the rich, rather than having the modesty to temper their demands, this time have made the calculated bet that they are politically invulnerable—Wall Street moguls angrily and successfully rejected executive-compensation limits even for banks that had been bailed out by taxpayer funds. And what I saw in Congress after the 2008 crash confirms what economist Simon Johnson has said: that Wall Street, and behind it the commanding heights of power that control Wall Street, has seized the policy-making apparatus in Washington. Both parties are in thrall to what our great-grandparents would have called the Money Power. One party is furtive and hypocritical in its money chase; the other enthusiastically embraces it as the embodiment of the American Way. The Citizens United Supreme Court decision of two years ago would certainly elicit a response from the 19th-century populists similar to their 1892 Omaha platform. It called out the highest court, along with the rest of the political apparatus, as rotted by money.
We meet in the midst of a nation brought to the verge of moral, political, and material ruin. Corruption dominates the ballot-box, the Legislatures, the Congress, and touches even the ermine of the bench. The people are demoralized. … The newspapers are largely subsidized or muzzled, public opinion silenced, business prostrated, homes covered with mortgages, labor impoverished, and the land concentrating in the hands of capitalists. The urban workmen are denied the right to organize for self-protection, imported pauperized labor beats down their wages. … The fruits of the toil of millions are boldly stolen to build up colossal fortunes for a few, unprecedented in the history of mankind, and the possessors of these, in turn, despise the Republic and endanger liberty. From the same prolific womb of governmental injustice we breed the two great classes—tramps and millionaires.
It is no coincidence that as the Supreme Court has been removing the last constraints on the legalized corruption of politicians, the American standard of living has been falling at the fastest rate in decades. According to the Federal Reserve Board’s report of June 2012, the median net worth of families plummeted almost 40 percent between 2007 and 2010. This is not only a decline when measured against our own past economic performance; it also represents a decline relative to other countries, a far cry from the post-World War II era, when the United States had by any measure the highest living standard in the world. A study by the Bertelsmann Foundation concluded that in measures of economic equality, social mobility, and poverty prevention, the United States ranks 27th out of the 31 advanced industrial nations belonging to the Organization for Economic Cooperation and Development. Thank God we are still ahead of Turkey, Chile, and Mexico!
This raises disturbing questions for those who call themselves conservatives. Almost all conservatives who care to vote congregate in the Republican Party. But Republican ideology celebrates outsourcing, globalization, and takeovers as the glorious fruits of capitalism’s “creative destruction.” As a former Republican congressional staff member, I saw for myself how GOP proponents of globalized vulture capitalism, such as Grover Norquist, Dick Armey, Phil Gramm, and Lawrence Kudlow, extolled the offshoring and financialization process as an unalloyed benefit. They were quick to denounce as socialism any attempt to mitigate its impact on society. Yet their ideology is nothing more than an upside-down utopianism, an absolutist twin of Marxism. If millions of people’s interests get damaged in the process of implementing their ideology, it is a necessary outcome of scientific laws of economics that must never be tampered with, just as Lenin believed that his version of materialist laws were final and inexorable. If a morally acceptable American conservatism is ever to extricate itself from a pseudo-scientific inverted Marxist economic theory, it must grasp that order, tradition, and stability are not coterminous with an uncritical worship of the Almighty Dollar, nor with obeisance to the demands of the wealthy. Conservatives need to think about the world they want: do they really desire a social Darwinist dystopia? The objective of the predatory super-rich and their political handmaidens is to discredit and destroy the traditional nation state and auction its resources to themselves. Those super-rich, in turn, aim to create a “tollbooth” economy, whereby more and more of our highways, bridges, libraries, parks, and beaches are possessed by private oligarchs who will extract a toll from the rest of us. Was this the vision of the Founders? Was this why they believed governments were instituted among men—that the very sinews of the state should be possessed by the wealthy in the same manner that kingdoms of the Old World were the personal property of the monarch? Since the first ziggurats rose in ancient Babylonia, the so-called forces of order, stability, and tradition have feared a revolt from below. Beginning with Edmund Burke and Joseph de Maistre after the French Revolution, a whole genre of political writings—some classical liberal, some conservative, some reactionary—has propounded this theme. The title of Ortega y Gasset’s most famous work, The Revolt of the Masses, tells us something about the mental atmosphere of this literature. But in globalized postmodern America, what if this whole vision about where order, stability, and a tolerable framework for governance come from, and who threatens those values, is inverted? What if Christopher Lasch came closer to the truth in The Revolt of the Elites, wherein he wrote, “In our time, the chief threat seems to come from those at the top of the social hierarchy, not the masses”? Lasch held that the elites—by which he meant not just the super-wealthy but also their managerial coat holders and professional apologists—were undermining the country’s promise as a constitutional republic with their prehensile greed, their asocial cultural values, and their absence of civic responsibility. Lasch wrote that in 1995. Now, almost two decades later, the super-rich have achieved escape velocity from the gravitational pull of the very society they rule over. They have seceded from America.
Plutonomy: The Memo Citigroup Doesn’t Want You to See – Bill Black
White collar criminologist William Black dissects a 2005 Citigroup memo intended for its wealthist clients that describes the US, UK, and Canada as plutonomies — countries where rule by an ultra-rich managerial class has replaced democracy. Black is former federal regulator and author of “The Best Way to Rob a Bank is to Own One.”
CITIGROUP’s PLUTONOMY MEMOS
Two bombshell documents that Citigroup’s lawyers try to suppress, describing in detail the rule of the first 1%
by Patrick / December 10, 2011
“Are they real?” That’s the question people usually ask when they hear for the first time of the “Citigroup Plutonomy Memos.” The sad truth is: Yes, they are real, and instead of being discussed on mainstream media outlets all over America and beyond, Citigroup was surprisingly successful so far in suppressing these memos, using their lawyers to issue takedown-notices whenever these memos were being made available for download on the internet. So what are we talking about? In 2005 and 2006, several analysts at Citigroup took a very, very close look at the economic inequalities within the USA and other countries and wrote two memos which were addressed to their very wealthy customers. If there is one group of people who need to know the truth about what is really going on within the society and the economy, minus the propaganda, then it’s businesspeople who have a lot of money to invest, and who want to invest wisely. So Citigroup did their duty and published two explosive memos, which should have become mainstream news, but eventually did not. The first memo is dated October 16, 2005 (35 pages) and is titled:“Plutonomy: Buying Luxury, Explaining Global Imbalances.” The second memo is dated March 5, 2006 (18 pages) and is titled: “Revisiting Plutonomy: The Rich Getting Richer”
A few years ago, two copies of these memos were leaked and were published on the internet. Usually one should think that once such important documents are in the “public domain”, nothing should stop them any more from being distributed and being openly discussed. However, the lawyers of Citigroup, Kilpatrick Townsend & Stockton LLC, work hard to prevent exactly that from happening. Examples of their activities can be found all over the internet. It is apparent that Citigroup is paranoid that these memos by their analysts are being widely distributed. It is not necessary to include a download link in this post, as the memos are pretty easy to find with a simple google search. However, Citigroup seems to have been successful in preventing a wider discussion about the memos, due to their legal actions. This needs to stop, as every American and every citizen in the western world needs to know what people like the analysts of Citigroup really think about the inequalities which exist within the societies, how the rich should preserve their domination, and what possible “backlash” can be expected – and what the consequences are of living in a “plutonomy.” At the beginning of the first memo “Plutonomy: Buying Luxury, Explaining Global Imbalances”, the analysts introduce the subject:
Little of this note should tally with conventional thinking. Indeed, traditional thinking is likely to have issues with most of it. We will posit that:
1) the world is dividing into two blocs – the plutonomies, where economic growth is powered by and largely consumed by the wealthy few, and the rest. Plutonomies have occurred before in sixteenth century Spain, in seventeenth century Holland, the Gilded Age and the Roaring Twenties in the U.S. What are the common drivers of Plutonomy? Disruptive technology-driven productivity gains, creative financial innovation, capitalist- friendly cooperative governments, an international dimension of immigrants and overseas conquests invigorating wealth creation, the rule of law, and patenting inventions. Often these wealth waves involve great complexity, exploited best by the rich and educated of the time.
2) We project that the plutonomies (the U.S., UK, and Canada) will likely see even more income inequality, disproportionately feeding off a further rise in the profit share in their economies, capitalist-friendly governments, more technology-driven productivity, and globalization.
Citigroup explains how the “non-rich” consumers become increasingly irrelevant within the “plutonomies”:
4) In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take. There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie. Consensus analyses that do not tease out the profound impact of the plutonomy on spending power, debt loads, savings rates (and hence current account deficits), oil price impacts etc, i.e., focus on the “average”consumer are flawed from the start. It is easy to drown in a lake with an average depth of 4 feet, if one steps into its deeper extremes. Since consumption accounts for 65% of the world economy, and consumer staples and discretionary sectors for 19.8% of the MSCI AC World Index, understanding how the plutonomy impacts consumption is key for equity market participants.
The analysts of Citigroup then invent a new term – “The New Managerial Aristocracy”:
THE UNITED STATES PLUTONOMY – THE GILDED AGE, THE ROARING TWENTIES, AND THE NEW MANAGERIAL ARISTOCRACY
Let’s dive into some of the details. As Figure 1 shows the top 1% of households in the U.S., (about 1 million households) accounted for about 20% of overall U.S. income in 2000, slightly smaller than the share of income of the bottom 60% of households put together. That’s about 1 million households compared with 60 million households, both with similar slices of the income pie!
Clearly, the analysis of the top 1% of U.S. households is paramount. The usual analysis of the “average” U.S. consumer is flawed from the start. To continue with the U.S., the top 1% of households also account for 33% of net worth, greater than the bottom 90% of households put together. It gets better(or worse, depending on your political stripe) – the top 1% of households account for 40% of financial net worth, more than the bottom 95% of households put together.
This is data for 2000, from the Survey of Consumer Finances (and adjusted by academic Edward Wolff). Since 2000 was the peak year in equities, and the top 1% of households have a lot more equities in their net worth than the rest of the population who tend to have more real estate, these data might exaggerate the U.S. plutonomy a wee bit. Was the U.S. always a plutonomy – powered by the wealthy, who aggrandized larger chunks of the economy to themselves? Not really.
Citigroup also makes clear what the CEO’s of the world need: More money. Quote:
Society and governments need to be amenable to disproportionately allow/encourage the few to retain that fatter profit share. The Managerial Aristocracy, like in the Gilded Age, the Roaring Twenties, and the thriving nineties, needs to commandeer a vast chunk of that rising profit share, either through capital income, or simply paying itself a lot. We think that despite the post-bubble angst against celebrity CEOs, the trend of cost-cutting balance sheet-improving CEOs might just give way to risk-seeking CEOs, re-leveraging, going for growth and expecting disproportionate compensation for it. It sounds quite unlikely, but that’s why we think it is quite possible. Meanwhile Private Equity and LBO funds are filling the risk-seeking and re-leveraging void, expecting and realizing disproportionate remuneration for their skills.
But does placing so much money in so few hands also pose risks? Maybe the 99% of the population, or let it be 90-95%, it does not matter, will be unhappy about being ruled by the super rich? Fortunately for the investors, the analysts at Citigroup also considered these points and started to think about the plebs who, as history shows, have a tendency to be unruly, if poor. So the analysts started to think about “losers”, as they call them, or the people who could need a bath, as Newt Gingrich would call it. The Citigroup analysts basically predicted the OWS-movement. In considering these aspects, the analysts also discovered that there is a terrifying factor to consider – that the poor don’t have much economic power, but that they “have equal voting power with the rich.” Quote:
IS THERE A BACKLASH BUILDING?
Plutonomy, we suspect is elastic. Concentration of wealth and spending in the hands of a few, probably has its limits. What might cause the elastic to snap back? We can see a number of potential challenges to plutonomy.
The first, and probably most potent, is through a labor backlash. Outsourcing, offshoring or insourcing of cheap labor is done to undercut current labor costs. Those being undercut are losers in the short term. While there is evidence that this is positive for the average worker (for example Ottaviano and Peri) it is also clear that high-cost substitutable labor loses. Low-end developed market labor might not have much economic power, but it does have equal voting power with the rich. We see plenty of examples of the outsourcing or offshoring of labor being attacked as “unpatriotic” or plain unfair. This tends to lead to calls for protectionism to save the low-skilled domestic jobs being lost. This is a cause championed, generally, by left-wing politicians. At the other extreme, insourcing, or allowing mass immigration, which might price domestic workers out of jobs, leads to calls for anti-immigration policies, at worst championed by those on the far right. To this end, the rise of the far right in a number of European countries, or calls (from the right) to slow down the accession of Turkey into the EU, and calls from the left to rebuild trade barriers and protect workers (the far left of Mr. Lafontaine, garnered 8.5% of the vote in the German election, fighting predominantly on this issue), are concerning signals. This is not something restricted to Europe. Sufficient numbers of politicians in other countries have championed slowing immigration or free trade (Ross Perot, Pauline Hanson etc.).
Then comes a key-part of the first “Plutonomy” memo: Plutonomy only works if the members of a society have the impression that they can still participate, despite the harsh inequalities, that they “can join it.”The analysts use the term “robber-baron economies” and conclude that a “potential social backlash” is possible. Becoming a “Pluto-participant” is the “embodiement of the ‘American Dream'” -and this dream should not die, otherwise the Plutocrats could be in real trouble. Quote:
A third threat comes from the potential social backlash. To use Rawls-ian analysis, the invisible hand stops working. Perhaps one reason that societies allow plutonomy, is because enough of the electorate believe they have a chance of becoming a Pluto-participant. Why kill it off, if you can join it? In a sense this is the embodiment of the “American dream”. But if voters feel they cannot participate, they are more likely to divide up the wealth pie, rather than aspire to being truly rich.
Could the plutonomies die because the dream is dead, because enough of society does not believe they can participate? The answer is of course yes. But we suspect this is a threat more clearly felt during recessions, and periods of falling wealth, than when average citizens feel that they are better off. There are signs around the world that society is unhappy with plutonomy – judging by how tight electoral races are. But as yet, there seems little political fight being born out on this battleground.
A related threat comes from the backlash to “Robber-barron” economies. The population at large might still endorse the concept of plutonomy but feel they have lost out to unfair rules. In a sense, this backlash has been epitomized by the media coverage and actual prosecution of high-profile ex-CEOs who presided over financial misappropriation. This “backlash” seems to be something that comes with bull markets and their subsequent collapse. To this end, the cleaning up of business practice, by high-profile champions of fair play, might actually prolong plutonomy.
The second memo, titled “Revisiting Plutonomy: The Rich Getting Richer” deals mainly with the consequences for investments which follow the analysis in the first memo. Quote:
There are, in our opinion, two issues for equity investors to consider. Firstly, if we are right, that plutonomy is to blame for many of the apparent conundrums that exist around the world, such as negative savings, current account deficits, no consumer recession despite high oil prices or weak consumer sentiment, then so long as the rich continue to get richer, the likelihood of these conundrums resolving themselves through traditionally disruptive means (currency collapses, consumer recessions etc) looks low. The first consequence for equity investors who worry about these issues, is that the risk premia they ascribe to equities to reflect these conundrums/worries, may be too high. Secondly, if the rich are to keep getting richer, as we think they will do, then this has ongoing positive implications for the businesses selling to the rich. We have called these businesses “Plutonomy stocks”. We see three reasons to take another look at those plutonomy stocks.
Citigroup seems to be perfectly happy with the rule of the rich. They are also perfectly happy to suppress these explosive memos. What if Americans don’t believe into the American Dream any more? What if the thoughts of OWS-protesters slip into the mainstream? (Fortunately, this is already happening). The rule of the 1% is not a conspiracy theory, it’s a fact, as the Citigroup analysts explain in great detail. The citizens in the “Plutonomies” are expected to swallow this bitter pill. The Koch Brothers and others can buy politicians and make sure that they get their way, also thanks to the Koch-friend Clarence Thomas and his colleagues in the Supreme Court who made the “Citizens United” decision possible. But don’t forget: You “have equal voting power with the rich.” To me, free elections do not seem to be compatible with a plutonomy. But the 1% seem to try to take care of this problem, as the USA has witnessed sophisticated examples of election fraud since 2000, and the country is at the same time drowning in propaganda, for example by the Koch-Brothers propaganda machine, who are gearing up for 2012, the “the mother of all wars”, because “we have Saddam Hussein”, as Charles Koch casually remarked at their secret summer seminar in 2011:
While I researched the subject, I discovered that there also exists an additional third, shorter Citigroup memo, dated September 29, 2006, which is being mentioned here. The summary on the first page of this memo, which another report for their super-wealthy investors, boldly presents “Plutonomy” not only as a fact, but a business great business opportunity:
The Plutonomy Symposium — Rising Tides Lifting Yachts
➤ Time to re-commit to plutonomy stocks – Binge on Bling.
Equity multiples appear too low, the profit share of GDP is high and likely going higher, stocks look likely to beat housing, and we are bullish on equities. The Uber-rich, the plutonomists, are likely to see net worth-income ratios surge, driving luxury consumption. Buy plutonomy stocks (list inside).
➤ Plutonomy stocks at a premium, but relative pricing power is key.
➤ Our Plutonomy Symposium take-aways.
The key challenge for corporates in this space is to maintain the mystique of prestige while trying to grow revenue and hit the mass-affluent market. Finding pure-plays on the plutonomy theme, however, is tricky.
➤ Plutonomy and the Great Conundrums of our age.
We think the balance sheets of the rich are in great shape, and are likely to continue to improve. Don’t be shocked if the savings rate worsens as equities do well.
➤ What could go wrong?
Beyond war, inflation, the end of the technology/productivity wave, and financial collapse, we think the most potent and short-term threat would be societies demanding a more ‘equitable’ share of wealth.
Yes, what could possibly “go wrong?” The “threat” exists that societies would be “demanding a more ‘equitable’ share of wealth.” Thank God that we have such splendid police forces whose members seem to be very happy to quash any unrest with batons, tear gas, pepper spray and a high degree of rough behaviour in order to keep the plutonomists happy! Despite not having received widespread mainstream coverage, the Citigroup memos have been discussed in a handful TV-clips or documentaries. When Bill Moyers “signed off” with his last broadcast in 2010, he extensively quoted from the Citigroup memos and explicitly warned that Plutocracy and Democracy “do not mix”:
Finally, a note for you-know-who:
17 U.S.C. § 107
Notwithstanding the provisions of sections 17 U.S.C. § 106 and 17 U.S.C. § 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include:
the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; the nature of the copyrighted work; the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and the effect of the use upon the potential market for or value of the copyrighted work. The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.