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Regular readers of this column (and there might be some) know by now that I am given to rants against the banks, accusing them of being plutocrats and oligarchs, and sometimes descending into even stronger language. But I did not expect to receive confirmation of this thesis from the nation’s biggest bank. Citibank uses a term to describe our economy which has never occurred to me, “plutonomy,” an economy run for the benefit of the rich. This is the term we find in a Citibank investment advisory letter from March, 2006. The memo itself is rather remarkable. It sounds like a satire written by some mad Distributist (like me, for example). But no, they are in deadly earnest, and unlike the mad Distributist, they are quite happy about the situation.

On Citibank’s analysis, in the U.S., the UK, Canada and Australia, “the rich take an increasing share of income and wealth over the last 20 years, to the extent that the rich now dominate income, wealth, and spending in these countries.” They speak but the truth; the top 10% of households accounted for 43% of income when the memo was written. “In total, the top 20% accounted for 68% of total income; the bottom 40%, for just 9%.” And the situation is worse when we look at wealth. The top 10% account for 57% of household net worth; the bottom 40% share only 9%.

The writers of this letter point out that in other places, such as Japan and much of Western Europe, the rich were confined to pretty much the much the same share they had in the 80’s, but in the plutonomies, such as the US, the “capitalists benefit disproportionately from globalization and the productivity boom, at the expense of labor.” In other words, the imbalance is not necessary, but a creation of particular forces within the plutonomies.

Citibank does note that the rich face some problems. For example, the CLEW Index has rising much faster than the Consumer Price Index. And what is the CLEW, you may ask? It is the Cost of Living Extremely Well, which measures such essential items as the price rise in Beluga caviar or a suite at the Four Seasons. Pity the poor rich. As the authors note, “In 2005, the CLEW Index rose 4%, while US CPI rose at 3.6%.” Well, no wonder the rich have to claim such a large share of the income “at the expense of labor.” What laboring man really needs Beluga caviar in his lunch box?

The Citibank analysts note that plutonomy explains many of the conundrums in the economy. For example, they note that the rising price of oil did not dampen demand, for the simple reason that the price means nothing to the rich. They can fill their Hummers and Porsches with what amounts to spare change, in effect outbidding everybody else, who must economize in hard times. The economy of the many should drive down usage, and therefore the price, but that simple market wisdom does not work in the face of great imbalances.

Another conundrum explained by this imbalance is the low savings rate. It is received wisdom that Americans are profligate, especially the poor and middle classes. They don’t save, which is precisely why they are poor, and because of their bad habits the nation has a net negative savings rate. The truth is otherwise, as the authors point out. The bottom 2 quintiles were actually saving at a respectable 7% rate in 2000. Meanwhile, the top 20% were actually dissaving (their word, not mine) at a rate of 2% of their considerable incomes. But since they so dominate income, their dis-savings consumed everybody else’s savings, leaving no net national savings.

The authors do note one threat to the hegemony of the rich:

[T]he rising wealth gap between the rich and poor will probably at some point lead to a political backlash. Whilst the rich are getting a greater share of the wealth, and the poor a lesser share, political enfranchisement remains as was – one person, one vote (in the plutonomies). At some point it is likely that labor will fight back against the rising profit share of the rich and there will be a political backlash against the rising wealth of the rich. This could be felt through higher taxation (on the rich or indirectly though higher corporate taxes/regulation) or through trying to protect indigenous laborers, in a push-back on globalization – either anti-immigration, or protectionism.

In other words, Joe the Plumber might get a brain and actually start voting against the policies which keep these people in power. But I doubt it. Most people subscribe to the “John Gault” myth that the rich are rich because they have earned their incomes by contributing to the productive powers of the economy. And some have. But by and large, the increasing share that the rich get is not due to productive power, but to political and economic power, and particularly the power to free themselves from any public obligations,through lower taxes, for example, or any public control, through de-regulation, especially of the finance industry. And here we get into arcane matters to which Joe the Plumber does not give much thought. At least, not now. And probably not until the situation becomes so bad that it can no longer be ignored. I think that day is now in sight.

Why? Because this situation has been building for 30 years, and has involved repeated crises, all of which have been covered by an increasing scale of government intervention in behalf of the rich. The authors of the memo venture no explanation of why the rich have been able to claim a larger share. For that, we need to turn to the analysis of Simon Johnson, former chief economist at the IMF. And Johnson finds a “doom cycle” built into the very structure of the financial system, ever since the Reagan Revolution. Johnson summarizes his analysis in this short film.

He finds that since Reagan, the banks and other financial institutions have an in-built incentive to take ever-greater risks, and to grow as large as possible. This is because the risk rewards are asymmetric. The bankers can make massive amounts of money by taking massive risks. But when the bets fail, they can get bailed out. Thus, there are great rewards for success, and no penalties for failure. The profits are privatized, the losses are socialized. How far are they socialized? The Congressional Budget Office estimates that the portion of the public debt attributable to bailouts amounts to 40% of GDP. And then there are the 8 million jobs lost. That’s a lot of socialization.

What deregulation has set up is a doom cycle. An increased incentive to take risks, resulting, initially, in out-sized profits, then in massive failures, creating a need for bailouts, which leave the same people in charge, and the game begins again. Already, the profits of the banks are rebounding to pre-crash levels, but not on the strength of their lending to productive businesses (which by and large they aren’t doing) but by the same risky ventures that got us here in the first place. We are already repeating the cycle.

The rewards from the finance sector far outstrip the profits from manufacturing and other non-financial sectors of the economy. But in a sane economy—in an economy that is not actually a plutonomy—this cannot happen. The purpose of finance is to assist productive activities, and the rewards cannot logical exceed those of the things they finance. Yet that is precisely what has happened.

Further, the grip of the financial sector over the economy continues to grow. In the 1990’s, the Big 6 financial institutions controlled assets equal to 20% of GDP; today their assets are 60% of GDP. “Too big to fail,” and getting bigger by the moment. This is in an industry which, as Simon notes, “involves massive abuse of consumers, where they speak openly about ‘ripping the face off their customers.’”

But plutonomies are not stable, and doom cycles end in doom for everybody involved. The task of Front Porch Republicans, I believe, is to save what can be saved, and build what must be built. Up to this moment, that task has been theoretical; soon it will be actual.

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  1. Serious stuff here John and thank you for writing about it. I actually think this is THE most important issue we face.

    Of course on this site there is a tradition of at least attempting to respond to such a post with intelligent and articulate commentary. But after this read all I can say – I want to vomit.

  2. Didn’t somebody say something about a “boot on the face of humanity forever”?

    Wow. What a memo. We should share it with our kids.

  3. Bob, it has the minor drawback of not actually reforming healthcare.

    Ig, share it with your congressman.

    Cecelia, that reminds of the stage production that included, among other things, and elephant. The elephant, as his unscripted contribution to the production, did on stage what elephants do. Someone remarked, “Shocking manners, of course, but gawd, what a critic!”

  4. John Médaille: “Ig, share it with your congressman.”

    I can’t tell, but I’m guessing you’re being facetious. I’m not sure that forwarding the memo to a Congressman would do much good. The plutocrats already own Congress. We have “the best Congress money can buy” as the saying goes.

  5. It seems possible now to reach the conclusion that the latest financial crisis resulted from putting credit creation in the hands of the bankers (Federal Reserve) in 1913 and super-charging it yet again (despite the Great Depression lessons) with wholesale financial deregulation starting in the early Eighties under Reagan. Avoiding future financial crises can only be achieved with government action that changes control of credit creation and reverses much of the financial deregulation of the last thirty years. Clearly after John Boehner’s remark to the banker’s association to fight back against Democrat Punk Staffers drawing up plans for fresh regulation nobody can expect anything in the way of constructive action from the Republican Party and it is debatable whether the Democrats will be that effective given their dependency on campaign finance from the financial industry. Only a new incorruptible party stands any real chance of stopping the Doom Cycle.

  6. Wow! The more I think about this, the more important it looks.

    It’s like those science-fiction stories where the gambler finds a time-warp and reads tomorrow’s newspapers, betting on his unique inside knowledge.

    In this case the insiders knew something equally esoteric: they understood correctly that the LAWS OF ECONOMICS had been altered within their part of the universe, while the outsiders were still calculating by the old laws.

  7. Would welcome John’s take on the Fall issue of communio focusing on: Money, in particular related to financing of the health care of the participants of human life – ie us. Assuming our US credit-based monetary system (you lend it, they’ll borrow it. Private or public, who cares so long as its booked as an asset under the liabilities column and we can print paper backed by the “promise to pay”?) where debt aka unfunded mandates is what we’re being led to believe drives all economic households. What is the nature of health, when any expense (cost, price) will rob the collective of its institutional “aggregate capital” (ie deflationary ageing and disease is detrimental to the pooling of risk, therefore to be “inflated” away. Will abortion and euthanasia assume norm status for the common good?

  8. It’s good to be a bankster.

    I was listening to the radio yesterday about how banks are just sitting on properties and refusing to recognize the loss. I realized they can do that only because they are the creators of money with dwindling reserve requirements. Now I’ve read this from Bernanke himself:

    Given the very high level of reserve balances currently in the banking system, the Federal Reserve has ample time to consider the best long-run framework for policy implementation. The Federal Reserve believes it is possible that, ultimately, its operating framework will allow the elimination of minimum reserve requirements, which impose costs and distortions on the banking system.

    Is there something I’m missing or is that just a recipe for disaster?

  9. Aside from the fact that it has the air of the Weimar about it and the breezy sense of all boats rising in the global technocrat’s plutonomian ports of call, it brings to mind Iggy Pops fine rendition of the old rock standard “Louie Louie”

    I can’t remember all the words but its something like;

    “The communist world is fallin apart. the capitalists are just breaking hearts. Money is the reason to be, It makes me just wanna sing Louie Louie……… But Hey , Life after bush and gorbachev, the wall is down but something is lost…turn on the news and it looks like a movie, it makes me wanna sing “Louie Louie”.

    As one deeply imbedded in the plutonomy, I seem to find myself singing Louie Louie a lot lately. The Ig has moved on to Cabaret Lounge Singing, fully in tune with the air redolent of Weimar.

  10. @Clare, I am not sure I understand all of your remarks, but in re Communio’s Money issue, I have read it, but the list of authors looks very good. It should be a worthwhile read.

    @Albert, The banks have been slow-rolling foreclosures, because if they took them all now, and had to recognize the loss on their books, they would be insolvent. Or rather, they would be known to be insolvent; they are already insolvent, it just doesn’t show up in their books. I like the idea that reserves “impose costs and distortions” upon banking. In a way, that’s true, but not the way Bernanke means it. The whole system of privatized money creation is itself a distortion. IN any case, “reserves” are somewhat of a fantasy. The banks make loans, and then look around for reserves to bank them. They can get them from other banks, or from the discount window. But if they seriously overlend-as they did–they know that the Fed has to create reserves to back them up. Or at least it does for the big banks; the regional and community banks have no such guarantee.

    @DW, we may be something even more weird than Weimar, a deflationary banking system in the face of expanded reserves. Monetarism takes another blow from reality, but zombie-like it keeps moving along as the only operational theory. I was never able to interpret the fascination with zombie movies, but now as I view them as an metaphor for the banking system, they make perfect sense.

  11. John,

    Not directly related to this post, but regarding the one on Microfinance: I recently discovered that World Vision is utilizing the microfinance model. Just thought you and other readers would be interested to know – it’s encouraging to hear about. I hope to discover more relief organizations and NGO’s engaging in these practices.

  12. Deflationary banking system plus expanded reserves = Inflation deferred…as they make up things as they go along. Perhaps it is a slow enough motion Weimar, the effects can be delayed past the upcoming election cycle/s.

  13. DW, Inflation may not be deferred, because the question is not (contra the monetarists and gold bugs) just how much money is created, but how much money is moving. The formula is MV = PQ, and if V is zero, or nearly, it doesn’t matter how much M changes. There is only two ways in practice to get it moving: by lending or by wages, and usually the former is related to the later. Lending is down, precisely because wages aren’t moving. Until the wages rise, the mass of men have no access to the increase in money; V = 0.

  14. Reserves may be somewhat illusory, but it’s still incredible to hear Bernanke plainly say they should be gotten rid of completely.

  15. “The purpose of finance is to assist productive activities, and the rewards cannot logical exceed those of the things they finance.”

    That word you are using, “logically” — I don’t think it means what you think it means.

  16. “The Congressional Budget Office estimates that the portion of the public debt attributable to bailouts amounts to 40% of GDP.”

    Hi John,

    Do you know where I can find the CBO report you mention above? This is just too outrageous, especially when you consider that some of these institutions who benefit from the bailouts are the same ones that will later classify risk of economies such as the U.S.’s based on factors such as their indebtedness.

  17. Please elaborate on subject of “parvicide”(targeted destruction of “the small people”) as an articulated policy.

  18. Good for you ( hope you will add the word plutonomy to the tags)..I too am very focused on breaking the plutonoy and getting Americans to understand what is happening and that we can end it. As the Citibank memo notes the plutonomy requires the support of legislation..we can undo what has already been done..we can have greater transparency and a more more broadbased citizens watch to block laws designed to support the plutonomy..The plutonomy needs the support of the long as poeple believe that upward mobility is a reality..a possibiity for them they will not complain but there are lots of staistics now coming out that show there is little possibility of upward mobility..a recent report cncluded children born in America today will work very hard and stay poor all their lives and their children too.. by using the word plutonomy..spreading the statistics and publicizing that frightening and shocking citibank memo we can break the plutonomy. my blog is dedicated to that. And there are others having this same conversation..adam Burke at, Tom Atlee, many many..

    I am sure you know Vermont has a contsitutional ammendent under way in response to Citizens United that would declare that corporations are not natural persons. We can fucs light on that and spread the word on that.

    The internet is a power political tool..all of us committed to modern democracy, social and economic justice need to expand our efforts to use it outside the circle of our freinds and associates who already agree with us.

    Thnak you again for your contribution to this important work.

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