Wednesday, January 4, 2012

Citigroup tells it like it is

Income inequality is one of the hottest topics right now - and with good reason, as it has reached record heights, and is continuing to grow.

Citigroup, one of the world's largest financial institutions, wrote an excellent report on the subject back in 2005, which can be downloaded in two parts here and here. Even though it was written six years ago, it offers a much better insight as to how the world trully works, instead of all the usual delusions about "democracy". No wonder Citigroup is constantly trying to disappear its "Plutonomy Report" which was leaked (it was never supposed to be published).

In a nutshell, Citigroup describes the currect structure of our society as a "plutonomy", an economy "powered by the wealthy". But it also has some really interesting points to make about the rest of us, the "non-rich" people.

Here are some excerpts from Citigroup's report:
"The World is dividing into two blocs - the Plutonomy and the rest. The U.S.,UK, and Canada are the key Plutonomies - economies powered by the wealthy.
"We should at this point make clear that we have no view on whether plutonomies aregood or bad, our analysis here is based on the facts, not what we want society to look like."
In a plutonomy there is no such animal as “the U.S. consumer” or “the UK consumer”, or indeed the “Russian consumer”. There are rich consumers, few in number, but disproportionate in the gigantic slice of income and consumption they take.There are the rest, the “non-rich”, the multitudinous many, but only accounting for surprisingly small bites of the national pie."
the top 1% of households in the U.S., (about 1 million households) accounted for about 20% of overall U.S. income in 2000, slightly smaller than the share of income of the bottom 60% of households puttogether. That’s about 1 million households compared with 60 million households, both with similar slices of the income pie! Clearly, the analysis of the top 1% of U.S. households is paramount. The usual analysis of the “average” U.S. consumer is flawedfrom the start. To continue with the U.S., the top 1% of households also account for 33% of net worth, greater than the bottom 90% of households put together. It gets better(or worse, depending on your political stripe) - the top 1% of households account for40% of financial net worth, more than the bottom 95% of households put together."

The report even mentions the first signs of a crisis, which where becoming increasingly clear back in 2006, when Citigroup sent out this report to its wealthiest clients. However, Citigroup advices its clients "not to worry", because...we live in a "plutonomy", and the rich are in control. So even if a crisis does occur, they have the economic and political power to deal with it. And, unfortunatelly for us, Citigroup's analysis was spot-on, as Citigroup managed to receive billions of dollars from the US government, along with most of the other major banks. And these bailouts never seem to end, as workers, small-time businessmen, and even entire countries can't possibly repay all of their loans and mortgages, as they become poorer and poorer. This makes the banks insolvent, and they need trillions of dollars to cover their losses. But, just like Citigroup predicted, their huge economic and political power allows them to act like blacks holes "sucking in all the available recources", leaving no recources for the rest of us. No wonder they are ofter descrided as "zombies", or "vampires", etc.):
Most “Global Imbalances” (high current account deficits and low savings rates, highconsumer debt levels in the Anglo-Saxon world, etc) that continue to (unprofitably) pre-occupy the world’s intelligentsia look a lot less threatening when examined through the prism of plutonomy. The risk premium on equities that might derive from the dyspeptic “global imbalance” school is unwarranted - the earth is not going to be shaken off itsaxis, and sucked into the cosmos by these “imbalances”. The earth is being held up by the muscular arms of its entrepreneur-plutocrats, like it, or not."

 Here's another prediction by the analysts of Citigroup: The rich will continue to get richer
"We think the rich are likely to get even wealthier in the coming years.
These“content” providers, the tech whizzes who own the pipes and distribution, the lawyers and bankers who intermediate globalization and productivity, the CEOs who lead the charge inconverting globalization and technology to increase the profit share of the economy at the expense of labor, all contribute to plutonomy. Indeed, David Gordon and Ian Dew-Becker ofthe NBER demonstrate that the top 10%, particularly the top 1% of the US – the plutonomists in our parlance – have benefited disproportionately from the recent productivity surge in the US. ( See “Where did the Productivity Growth Go? Inflation Dynamics and the Distribution of Income”, NBER Working Paper 11842, December 2005)." 

Are there any dangers for this "plutonomy"? Yes, there are, and Citigroup seems to be aware of the fact that the poor can only take "so much" (as Machiavelli famously described "When neither their property nor honour is touched, the majority of men live content", but what happens when lose both of these things?)
"Plutonomy, we suspect is elastic. Concentration of wealth and spending in the hands ofa few, probably has its limits. What might cause the elastic to snap back? We can see a number of potential challenges to plutonomy.The first, and probably most potent, is through a labor backlash. Outsourcing,offshoring or insourcing of cheap labor is done to undercut current labor costs." [...]
We saved the best for last however, as Citigroup accurately describes the main reason why the capitalists are able to keep the lower classes "under control": It's the illusion that "everyone can join in", and become a member of the plutocracy himself. Why fight them, when you can become one of them and live the rest of your life as a wealthy and powerful individual?

However, wealth and power have become so concentrated, that more and more workers are realizing that they will never become a part of the upper class - in fact, they will never become a part of the middle class either (because the "middle class" is a "luxury" that western countries cannot afford anymore, as they have to compete against the likes of China, India, etc.). This is why more and more workers will have to fight back against the capitalists, instead of trying to become like them. This is a process that has already started (protests are becoming a wide-spread phenomenon, although we obviously have a long way to go before the working class actually is ready to seize power fot itself). Here's Citigroup's take on it:
Perhaps one reason that societies allow plutonomy, is because enough of the electorate believe they have a chance of becoming a Pluto-participant. Why kill it off, if you can join it? In a sense this is the embodiment of the “American dream”. But if voters feel they cannot participate, they are more likely to divide up the wealth pie, rather than aspire to being truly rich.
Could the plutonomies die because the dream is dead, because enough of society doesnot believe they can participate? The answer is of course yes. But we suspect this is athreat more clearly felt during recessions, and periods of falling wealth, than when average citizens feel that they are better off. There are signs around the world that society is unhappy with plutonomy - judging by how tight electoral races are. But as yet, there seems little political fight being born out on this battleground.
Our overall conclusion is that a backlash against plutonomy is probable at some point. However, that point is not now. So long as economies continue to grow, and enough of the electorates feel that they are benefiting and getting rich in absolute terms, even if they are less well off in relative terms, there is little threat to Plutonomy in the U.S., UK,etc.