WHAT IS Plutonomy
Plutonomy refers to an economy that exhibits massive income and wealth inequality, and where the spending and consumption activity of an extremely wealthy minority have an outsize impact on the economy.
BREAKING DOWN Plutonomy
Plutonomy became a buzzword within financial circles after Citigroup global equity strategist Ajay Kapur and his research team coined it in 2005 to describe the incredible growth of the U.S. As written by Citigroup in their October 16, 2005 memo to high net worth Citigroup clients, Plutonomy: Buying Luxury, Explaining Global Imbalances, Kapur and his team argued that an economy became a plutonomy when the spending by the ultra-rich dwarfs spending by average consumers.
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 during that period. In addition to the U.S., the analysts identified the U.K. and Canada as plutonomies.
As part of their analysis, Kapur and team recommended their clients take advantage of the inequality by investing in what they called a plutonomy basket, a stock portfolio made up of the luxury items favored by the wealthy. They indicated that a plutonomy portfolio would have returned an annual average close to 20 percent since the mid 1980s, better than the S&P 500® and other indices.
Characteristics of a Plutonomy
Kapur and team categorized plutonomies as deriving from three basic factors. First, they come by way of productivity driven by disruptive technology, financial innovation and cooperative governments that favor capitalism. In these instances, it is the rich that have the means to exploit these factors for their own gain.
Second, the idea of average consumers in a plutonomy doesn't exist. Rather, the rich account for a disproportionate percentage of the economy, while the non-rich have a negligible share. Kapur estimated that in 2005, the richest 20 percent may have been responsible for 60 percent of total spending.
However, in their report, Kapur and team also warned of the risk that because of political enfranchisement remaining as one person, one vote, at some point it is likely "labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth."