Plutonomy

What Is Plutonomy?

Plutonomy is a term that refers to the science of the production and distribution of wealth. The term first appeared in the middle of the 19th-century in the work of John Malcolm Forbes Ludlow. In modern times, Citigroup analysts, beginning with Ajay Kapur in 2005, have used the term to describe an economy in which the rich are the driving forces and main beneficiaries of economic growth. Others, including Noam Chomsky, have used the term to refer to a nation or economy in which wealth is concentrated in the hands of a few.

Understanding Plutonomy

Plutonomy became a buzzword within financial circles after Citigroup global equity strategist Ajay Kapur and his research team used the term to describe the incredible growth of the U.S. On Oct. 16, 2005, Kapur sent a memo to high-net-worth Citigroup clients titled, “Plutonomy: Buying Luxury, Explaining Global Imbalances." In the memo, Kapur and his colleagues argued that an economy becomes a plutonomy when spending by the ultra-rich dwarfs spending by average consumers. 

In 2005, Kapur estimated that the richest 20% may have been responsible for 60% of total spending.

In part, they devised the theory to explain how the U.S. economy could continue to grow despite contradictory elements, such as rising interest rates, commodity prices, and inflated national debt. Other than the U.S., the analysts also identified the United Kingdom and Canada as plutonomies.

Kapur and his team used this debate as a springboard to identify what types of investment strategies to execute. They recommended their clients take advantage of inequality by investing in what they called a plutonomy basket, a stock portfolio made up of the luxury items favored by the wealthy.

According to their research, a plutonomy portfolio would have returned an annual average close to 20% since the mid-1980s, easily outperforming the S&P 500 and other benchmark indices.

Requirements for Plutonomy 

"Asset booms, a rising profit share[,] and favorable treatment by market-friendly governments have allowed the rich to prosper and become a greater share of the economy in the plutonomy countries," Citigroup analysts wrote in their second research note on the topic, published on March 5, 2006. 

Throughout their reports, Kapur and his team argued that plutonomy was mainly facilitated by the following six basic factors:

Current Trends

Since Kapur and his team first wrote their report, the trend of income and wealth concentration among a select few appears to have continued. In the U.S., income disparity is at its highest level since the Bureau of Census began compiling records in the 1960s. Meanwhile, the Federal Reserve (the Fed) has claimed that everyone, bar the richest 10% of the population, has seen their total wealth decline over the past decade.

Average Annual Wage Growth by Income Percentile

Nevertheless, there are reasons to believe that Citigroup's nearly 15-year-old plutonomy stock inequality play may be about to run out of steam. In their report, Citigroup analysts predicted at some point that "labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth."

Some could argue that this political backlash they referred to is now gaining momentum. Ahead of the 2020 presidential election, Democratic candidates pledged to narrow the wealth gap. The Republicans, too, appear to have accepted that business-friendly measures are no longer readily accepted by the majority of the electorate.

After years of championing monetary policy that favored the rich, even some officials at the Fed have recently argued that monetary policy should take a more balanced approach to distributional outcomes, and the onus is now turning to economic stimulus measures that benefit average people. Kapur seems to agree. Now head of Asian and emerging market equity strategy at Bank of America Merrill Lynch in Hong Kong, Kapur pointed out that the U.S. finally appears to be addressing vast inequality, in part because antagonism toward plutonomy has reached a tipping point.