Our thesis is that the rich are the dominant drivers of demand in many economies around the world (the US, UK, Canada and Australia). These economies have seen 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. 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.
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Why as equity investors do we care about these issues?

Despite being in great shape, we think that global capitalists are going to be getting an even greater share of the wealth pie over the next few years, as capitalists benefit disproportionately from globalization and the productivity boom, at the relative expense of labor… Indeed, if the rich keep getting richer, as we suggest, savings rates might get even worse in the plutonomy countries. If plutonomy explains away many conundrums that our equity clients worry about, then this suggests the risk premia ascribed to equities might be too high. Furthermore, if the rich will be getting even richer in the coming years, this bodes extremely well for businesses selling to or servicing the rich, be it for example luxury goods stocks or private banks. The rich are a growing and captive market, who have the nice habit of relatively little price elasticity. The plutonomy basket of luxury goods stocks, private banks etc. has handsomely outperformed the S&P500 index since 1986, and we expect similar out performance from these types of stocks in the years to come…

Our whole plutonomy thesis is based on the idea that the rich will keep getting richer. This thesis is not without its risks… the rising wealth gap between the rich and poor will probably at some point lead to a political backlash … 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 … We don’t see this happening yet, though there are signs of rising political tensions. However we are keeping a close eye on developments.

Equity Strategy. Revisiting Plutonomy: the rich getting richer
Citigroup, March 5, 2006

A bald wig for Jack the Ripper who sits
At the head of the chamber of commerce
Mama’s in the fact’ry, she ain’t got no shoes
Daddy’s in the alley, he’s lookin’ for the fuse
I’m in the streets with the tombstone blues

Bob Dylan, Tombstone Blues

A fairly compelling argument by conservatives and libertarians, and compelling only because the facts as they describe them are impeachable, is that regulating business does not work because of regulatory capture. This is true and they don’t have to retreat to the abstract to make the case. As we have seen, the latest example is the Minerals Management Service, big business eventually overpowers government agencies that are originally set up to regulate their affairs and eventually has these agencies doing their bidding. The agencies approve of everything they want, which actually gives some legal cover for some of their dicier profit-making designs.

Where libertarians go astray here, as usual, is in identifying the culprit – government. Their other sin is one of omission. It is not just government that is captured, but actual free market agencies as well, which are just as susceptible to capture. The glaring example at hand for the moment are the credit ratings agencies like Moody’s that gilded the financial services’ lily with their triple AAA rated bullshit mortgage backed securities. Moody’s and other credit  ratings agencies were captured just as wholly as say, the Fed, because they are of and serve the same interests as the forces they are interacting with. Moody’s is exactly the kind of free market solution that libertarians are always suggesting would spring up and perform the role of government agencies with far better efficiency and ability if government would get the hell out of the way and let the markets work.

Another institution prone to capture is the U.S. media with its advertising revenue based model. Ironically, deregulation of the media and the mass consolidation that followed has led to a greater capture of the news media in adopting, promoting and protecting the interests of the elite and wealthy.

So if more regulation is not the answer, and neither is less regulation, what the hell is the answer? The question is the problem. Many of us want an easy to adhere to ideology or framework from which all answers spring. There is no easy answer, or at least one that wraps everything up nicely and solves every problem and creates an equilibrium after which we can retire to the couch and watch Project Runway and post pictures of our kitty Snookums to the blog. There will always be trade-offs and problems inherent in any human system, those considerations should not put us off from considering alternatives or reform of the existing one.
Continued…