Revisiting the 1-9-90 Rule

 | Nov 13, 2013 | 6:00 PM EST
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In the past four years it's become an annual event for me to discuss what I refer to as the "1-9-90 Rule." Some of the older columns are no longer available, but the gist of the rule is that society is broken into three distinct categories as measured by wealth: the top 1%, the next 9% below them, and then the bottom 90%. The 1% create the laws and systems for enforcing the laws they deem necessary. The next 9% are charged with enforcing those laws and the bottom 90% are required to abide by them.

There is nothing new in this theory; it's been a constant throughout human history regardless of political, governmental, economic or financial structures. The system works to maintain political, economic and social order only as long as the 9% self-identify with the 1% and not with the 90%. This order breaks down when the 9% begin to identify more closely with the 90% and begin to align their mandate with the 90%. If that happens, the system becomes a 1-99 model and revolution against the 1% begins.

As that potential arises, often as a result of lack of economic viability by the 90%, the 1% respond in four ways: increased income for public employees, increased police powers, increased economic incentives for the members of the 9% (usually by way of tax and fiscal measures), or marginally increased subsistence-level support for the bottom 90%.

Germane to the current situation in the U.S., this is playing out right now, just as it has throughout human history. Public employees' incomes, most importantly at the federal level and at the state level for policing authorities, have grown at a faster rate than the economy overall, along with the percentage of the population employed by them. This occurs because of the secular degradation of the economic viability of the bottom 90%, which has resulted in steadily declining purchasing power over the past 40 years.

One of the ways to counteract the steadily decreasing financial capacity of the bottom 90% has been to ensure access to debt, affording the opportunity to achieve the illusion (and delusion) of having achieved the American Dream by way of federally subsidized mortgages and private-sector access to nominal levels of other credit. Much of this public and private sector subsidy and support has been withdrawn since the financial crisis of 2008 and has caused the illusion/delusion of the bottom 90% to disappear abruptly.

Meanwhile, police at the federal, state and municipal levels have self-approved greater methods of enforcement. The establishment of the Transportation Security Administration and the expansion of power by the National Security Agency for domestic purposes on the federal side have been the most public representations of this. At the state and local levels, police have rapidly militarized and are increasingly mistreating members of the communities they serve.

There are growing reports of incidences of police employing dehumanizing tactics with respect to individuals they've arrested, such as male police officers arresting, stripping and videotaping female DUI suspects. Simultaneously, interest in gated communities has expanded beyond the 1% and into the 9%. And personal security requirements for the 1% now include armored vehicles.

Although the fulcrum of social stability rests upon the ability of the 9% to maintain order among the 90%, how it's done can result in a pro-cyclical response and cause civil unrest to increase rather than decrease, especially if it is done in the absence of public and private-sector policies intended to relieve the rising economic tensions of the 90%. Nothing on the horizon that I am aware of from public policy makers or the private sector is going to accomplish this.

The trajectory toward rising economic tensions and resulting social unrest commensurate with increasing rates of income and wealth concentration is worsening rather than improving. This provides a market for books such as Arrest-Proof Yourself, wherein the author, a former police officer, advises the reader that the police are out to arrest as many people as possible and that one should be prepared to soil themselves to avoid arrest.

From an investor's standpoint, there is little to do with this information other than to realize that it provides secular and fundamental support for the products of gun manufacturing companies Smith & Wesson (SWHC) and Sturm, Ruger (RGR) and ammunition manufacturers Olin Corp. (OLN) and Alliant Techsystems (ATK).

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