Sunday, October 19, 2008

Socialism 101: Redistribution of Negative Wealth

The Renaissance Italian Luca Pacioli is credited with the invention of double-entry bookkeeping (liabilities, equity, revenues, expenses and asset balance.) This enables businesses to calculate in terms of money their profitability and track their true capital.

When the government redistributes "wealth" it is not really redistributing what economists call wealth ("subjective satisfaction with a good, service or state of affairs") because that cannot be redistributed. Rather, it is redistributing profits orequity (assets). It does this by putting a liability or expense on the balance sheet of one individual or organization (usually in the form of taxes) and simultaneously putting an equity or revenue on the balance sheet of some other individual or organization. This is no different than any other transaction, except that it is not voluntary. Pacioli's double-entry bookkeeping could be used to track how this occurs all throughout our economy as wealth is redistributed by government fiat.

What I want to point out, however, is that negative wealth can also be redistributed, where I am using the term "negative wealth" to refer to liabilities. This is exactly what the bailout is, it is a transfer of liabilities or losses. Usually, the government moves an existing profit or equity from one individual or organization to another (taxes usually confiscate positive wealth). The bailout has the same net effect but works on the other column of the balance sheet. Instead of transferring money from you and me to Wall Street cronies as is usual, the government is this time transferring Wall Street's debts and losses to you and me. Different mechanism. Same difference.

In fact, if we were using Pacioli's double-entry bookkeeping to track it, we wouldn't see any difference at all. The government is still just placing a liability or loss on our balance sheets and placing an equity or profit on the balance sheets of the Wall Street fatcats. It's just business as usual, folks.

This isn't complicated. You perform double-entry bookkeeping every time you balance your checkbook. The net effect of this bailout is that Wall Street has been given the power to swipe your debit card and put debits on your checking account. It really is that simple. If you're not mad, you're either not understanding what's going on, or you're part of it and you should be ashamed of yourself.

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