Plutonomy

A plutonomy: the economic version of a plutocracy. You’ll know a plutonomy when you see one. It’s an economy with lots of cash and lots of wealth inequality. In a plutonomy, the manner in which the wealthy few spend their money can make or break the economy.

While “plutocracy” has been around for a long time, “plutonomy” was coined in 2005 to describe the U.S. by a Citigroup researcher. The 2005 memo to wealthy Citigroup peeps, "Plutonomy: Buying Luxury, Explaining Global Imbalances," explained that a plutonomy is when the spending of a few (the wealthier folk) eclipses the spending of the many (your average Janes and Joes who make a relatively negligible amount).

What was this Citigroup researcher telling its wealthy clients? In short, that a smart investing strategy is to invest where the money’s heading in the future: luxury goods. As inequality increases with the rich getting richer, the demand for luxury goods should go up.

But not without a warning. The memo also mentioned that the Janes and Joes will eventually say something about the “rising profit share of the rich,” which will cause some backlash. The more you have, the more you have to lose.

The big challenge here? Those who are wealthy are also the biggest taxpayers, for the most part (or donors who optimize estate tax laws). In California, for example, the highest paid 2% pay over 50% of the state's taxes. Yes, you read that right. So if you alienate that top tier group of people, then what does everyone else do when the rich decide to...go away?

Hi, Greece. How's life feelin' these days?