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Plutonomy

August 9, 2010 by staff 

Plutonomy, Who cares how the rich spend their money? Well, maybe everyone should nowadays. Consumer spending represents about two-thirds of U.S. The gross domestic product, or value of all goods and services produced in the country. And the rich spending now represents the largest share of consumer spending by at least 20 years.

According to new research from Moody’s Analytics, 5% of Americans by income account for 37% of all consumer spending. Expenses include consumer spending, interest payments on installment debt and transfer payments.

By contrast, the bottom 80% in the income account for 39.5% of total consumer spending.

Not surprisingly, of course, that the rich spend so much as win a disproportionate share of income. According to economists Thomas Piketty and Emmanuel Saez, the 10% of workers captured nearly half of all revenue from 2007.

What is surprising is the amount of consumption and our economy now depends on the rich, and the way in which the rate has increased as the U.S. emerge from recession. In the third quarter of 1990, the top 5% accounted for 25% of consumer spending. This was relatively stable until the mid-1990s, when it started inching up past 30%. Declined in 2003 and again in 2008, but began to rise through 2009 in the biggest bull market rally in history, with the Dow Jones industrial average rising nearly 50% in the last nine months of year.

Mark Zandi, chief economist at Moody’s Analytics, cites two main reasons for the increase. First, the rich panic during the financial crisis and failed to pass. When markets recovered, went out of their shell and started spending again. “I think the pent-up demand was unleashed,” he said. “It was an unusually high rate of expenditure.”

The second reason is that those people in the middle and lower income groups who are struggling to pay their debts and stay afloat amid rising unemployment, according to data on Friday, reminds us. That has crimped spending.

The data can be a sign that the U.S. is becoming a plutonomy-dependent economy and investment spending of the rich. And plutonomy are much less stable than the economies based on a more even income distribution and mass consumption. “I do not think it’s healthy for the economy is so dependent on the top 2% of the income distribution,” said Zandi. He added: “In the short term highlights the fragility of the recovery.”

In fact, spending the last of the rich may be unsustainable. Its savings rate has fallen from over 26% in 2008 to a negative 7% in the first quarter of 2010, according to Moody’s Analytics. They still have a lot of savings. But the mass appeal that in the past two years is likely to continue unabated.

“I think we’re seeing a slowdown in spending by this group,” says Mr. Zandi.

And that should be a concern for us all.

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