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 - I've also attached at the bottom of this post an entry in the Wall Street Journal Blog section from January 2007 - which 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, that 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

From the WSJ Blog:

It's well known that the rich have an outsized influence on the economy.

The nation's top 1% of households own more than half the nation's stocks, according to the Federal Reserve. They also control more than $16 trillion in wealth - more than the bottom 90%.

Yet a new body of research from Citigroup suggests that the rich have other, more-surprising impacts on the economy.

Ajay Kapur, global strategist at Citigroup, and his research team came up with the term "Plutonomy" in 2005 to describe a country that is defined by massive income and wealth inequality.

In a series of research notes over the past year, Kapur and his team explained that Plutonomies have three basic characteristics.

1. They are all created by "disruptive technology-driven productivity gains, creative financial innovation, capitalist friendly cooperative governments, immigrants...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. There is no "average" consumer in Plutonomies. There is only the rich "and everyone else."The rich account for a disproportionate chunk of the economy, while the non-rich account for "surprisingly small bites of the national pie." Kapur estimates that in 2005, the richest 20% may have been responsible for 60% of total spending.

3. Plutonomies are likely to grow in the future, fed by capitalist-friendly governments, more technology-driven productivity and globalization.

Kapur says that once we understand the Plutonomy, we can solve some of the recent mysteries of the American economy. For instance, some economists have been puzzled (especially last year) about why wild swings in oil prices have had only muted effects on consumer spending.

Kapur's explanation: the Plutonomy. Since the rich don't care about higher oil prices, and they dominate spending, higher oil prices don't matter as much to total consumer spending.

The Plutonomy also could explain larger "imbalances" such as the national debt level. The rich are so comfortably rich, Kapur explains, that they have started spending higher shares of their incomes on luxuries. They borrow much larger amounts than the "average consumer," so they have an exaggerated impact on the nation's debt levels and savings rates. Yet because the rich still have plenty of wealth and healthy balance sheets, their borrowing shouldn't be a cause for concern.