Socializing Financial Losses: What Does It Mean For You?

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It means economic decline, wasted wealth, fewer jobs, lower salaries, and a reduced standard of living.

Imagine that I start a business, and it fails. I lose $50,000 that I risked in the venture. But then imagine that I don’t have to worry, because you and each of our other three million citizens will be forced to chip in less than a penny to compensate me. That’s no skin off of your back, you might think.

But then suppose that I’m not the only one to be compensated. What if each person who lost various amounts of money from failed businesses each year were compensated for their losses?  According to the Small Business Administration (SBA), a record 672,000 businesses were started in 2005.  Also according to the SBA, 50% of these will fail within five years. The dollars start adding up.

This week, our government told us that we will all be forced to pay $700 billion to compensate various investment banks for their business losses. This is in addition to the $29 billion Bear Sterns Rescue, $300 billion for the Fannie Mae and Freddie Mac nationalization, and $85 billion for the AIG nationalization. All of these total over $1.1 trillion we each have to pay. That averages out to $3,666 per person, or almost $15,000 for a family of four.

Additionally, a good rule of thumb is to multiply by 5 or 7 times any dollar value estimate the government gives us for its spending. The per person expenditure then comes to over $18,000. This number is in addition to the $9.6 trillion of current government debt. And don’t forget the more than $10 trillion in “off-balance sheet” debt which is not counted in the official government debt number. Adding these together reveals that each citizen owes approximately $2 million.

The problem is that most of us citizens don’t think this affects our own lives very much. But it does! We just can’t see the harm because it’s hidden.

How Socializing Losses Harms You

By having to compensate financial institutions every decade for their losses, we lose our ability to produce wealth. When government, through taxes, forcibly takes part of our incomes in order to compensate those who carelessly made bad investments, or to pay interest on the debt (previous bailouts), we have less money. Thus, in addition to spending less, we save less than we would otherwise be able to.

But here’s the kicker: most of the total taxes paid are not paid by each of us citizens, most are paid by a minority of citizens – the “evil” rich. To quote Bruce Bartlett of Creators.com:

“in 2006, 53.7 percent of all federal income taxes were paid by those with incomes over $200,000. Those with incomes between $100,000 and $200,000 paid 28.3 percent of all individual income taxes. Thus those with incomes over $100,000 paid 82 percent of the total….Those with incomes below $40,000 paid no federal income taxes at all in the aggregate. The positive liability for those who paid anything was more than offset by tax rebates [paid for by the rich] from the Earned Income Tax Credit for many more who paid nothing”

The rich pay the most because they have the most. They save an overwhelming majority of their income. That which they save, is invested – it’s made available as capital to businesses. These businesses, with this capital, purchase factories, machinery, tools, technology, trucks and other capital goods. These capital goods make other capital goods, and they make all of our consumer goods. They also pay our salaries. Since these capital goods are used by workers to make things, the more capital each worker has, the more each worker can produce. Because of economic competition, workers are paid according to the amount they are capable of producing. It should be clear that the more wealth that is left with the rich, the more goods we can have in our lives at lower prices (the more goods produced, the less each one costs), and the more we will be paid for producing them.

But by having the rich’s wealth confiscated by taxes in order to pay for other capital destroyed by banks and investment banks, the fewer business the smaller amount of savings/capital can support. Alternatively, the bailouts might be financed by having the government print more money, or by going into more debt, as mentioned above. The outcome is the same regardless of the means of payment – our capital is being destroyed.

The result is fewer goods and services, fewer jobs, and lower salaries. But this happens slowly through time. Had we not already spent millions on bailing out financial institutions, you would instead see that you had a larger home, a higher salary, more luxury goods, more vacations, lower prices for everything you buy, or some combination of these. You don’t notice what you’re missing if you never had it. By accepting to bail out companies, we reduce our own standard of living. It is possible that our standard of living as a nation is already in decline, or might soon start to decline. We are well on the road to full socialism, and to economic retrogression.

Why Financial Bailouts Are “Needed”

Our government officials – the very same people who got us into this mess – tell us that the bailout is needed for the sake of saving the entire financial system. It is true that the system could collapse, but it’s only true because of the fact that these same “leaders” engage in creating money from thin air. They literally bring into existence money which did not previously exist.

Were it not for the fact that new credit is extended, and were all of our money actually backed by something of value, such as gold, all of our bank accounts would actually consist of real money instead of an IOU. Since the banking system takes money we deposit, adds to it almost 10 times that amount of fake money and lends it out to others, our bank could collapse if the loaned money is invested for a loss, because the bank does not have the money with which to repay us. It is because of the fractional reserve system – keeping only a portion of deposits in the bank and loaning the rest out – which creates the possibility that our bank could go bankrupt, and that it could also cause many others to go bankrupt as well.

Otherwise, if one group of people or businesses lost money, they would suffer losses and it would not affect the rest of us. Only a financial system based on debt is one that can cause a chain reaction of bank implosions. Not only is our debt-based financial system supported and encouraged by our government, it exists primarily so that government can take our money through inflation.

There is no economic benefit whatever to adding additional money to the economy. It’s not needed. Instead of being beneficial, credit creation is the sole cause of asset bubbles, financial crises, recessions, and widespread destruction of capital. Our current crisis has been building for many years, under both Republican and Democratic leadership. Virtually every single member of congress supports our current system. All of our politicians, regardless of party, are destroying our country and our lives. We MUST demand change. We must NOT vote for them if they do not support destroying our central bank. If you do not act now to demand change, they will destroy our country.

Kel Kelly @ September 24, 2008