{"id":23910,"date":"2021-01-23T12:13:54","date_gmt":"2021-01-23T12:13:54","guid":{"rendered":"https:\/\/www.currentaffairs.org\/2021\/01\/trumps-taxes-and-the-nature-of-money\/"},"modified":"2021-02-01T18:44:27","modified_gmt":"2021-02-01T18:44:27","slug":"the-nature-of-money","status":"publish","type":"post","link":"https:\/\/radiofree.asia\/2021\/01\/23\/the-nature-of-money\/","title":{"rendered":"The Nature of Money"},"content":{"rendered":"\n
Even as the pandemic and financial crisis introduce us to new and grotesque ways to suffer, it seems as if the rich have been spared the worst of it. Their net worth has increased by $637,000,000,000<\/a> while poor friends of mine beg for rent money on social media. It can feel as if there are two economies, one for us and another for the rich. This is wrong, however. There is only one economy. The difference between how the wealthy and the working classes experience the same world is not just in the amount of money we have and what that can buy\u2014it\u2019s built into the nature of money, as I learned when I was studying to become an accountant.<\/p>\n\n\n\n The first two classes in an accounting major outline a handful of extremely basic equations, standard forms (like the balance sheet and the statement of cash flows), and the theoretical underpinnings of accounting. They are considered \u201cwashout\u201d courses\u2014ones so difficult a significant number of people drop the major\u2014and it\u2019s not because of the math. Accounting requires no more than middle school algebra. If you want to know why it\u2019s so difficult, here is one of the very first thought problems I was presented with in one of my classes: <\/p>\n\n\n\n A hospital bought a painting to decorate its office from a then-unknown painter in the late 1800s for a dollar. Since acquiring it, its painter became very famous. The art would now sell for millions at auction. How do you record the value of the painting?<\/em><\/p><\/blockquote>\n\n\n\n There are multiple answers. For internal figures (called managerial accounting), the painting is worth whatever management would find most useful at any given time. How that\u2019s done, and what figures are recorded there, is unregulated. On the other hand, when preparing numbers for people outside the company, there are<\/em> rules. For tax reporting purposes, the hospital (with some exceptions) needs to have it assessed and recorded at fair market value. Fair market value is a different figure\u2014usually a more conservative one\u2014than what you\u2019d expect the painting to fetch at auction. For the purpose of enticing investors or seeking a loan, there\u2019s yet another answer: it depends on what the hospital plans to do with the painting in the near future. If they\u2019re willing to sell it in the next year or two (especially to repay a debt) then they should report it at fair market value. But if they wouldn\u2019t part with it under any circumstances, it should be recorded at the price it was acquired for\u2014a dollar. The painting is worth a lot of money, but if they\u2019re not planning to make use of that value, then they can\u2019t treat it as a resource. <\/p>\n\n\n\n To summarize, there are two correct ways to record the value of the painting, either \u201cfair market\u201d or \u201cacquisition\u201d value (i.e. the original purchase price), and neither of them are what the painting would actually \u201cbe worth\u201d in the conventional sense. Which value the accountant chooses depends not on anything objective, but on what the business plans to do with the painting.<\/p>\n\n\n\n This example breaks the kind of people who find an accounting major attractive. We\u2019re creatures who love objectivity and order, and accounting is not that.<\/p>\n\n\n\n The thought experiment about the painting isn\u2019t a weird edge case\u2014it\u2019s a typical day on the job. I used to audit natural gas companies, and there are many whose distribution systems are bringing in tens of millions of dollars a quarter, yet their infrastructure is worth $0. The first time I saw a company claiming to literally be worthless, I brought it to my boss because I swore it couldn\u2019t be right. He said, \u201cdepreciation,\u201d and I toddled off back to my desk. <\/p>\n\n\n\n We record the wear and tear infrastructure goes through as depreciation\u2014we slowly reduce its value, in other words\u2014and we do that in a standardized way. Usually this involves an evenly allocated reduction of value per year over the expected life of the asset\u2014for example, if a new oil pipeline is expected to last 10 years, we might subtract 10 percent each year until it\u2019s worth nothing. For other industries or assets, the rate of depreciation might be based on the number of units produced\u2014the more widgets are made, the less the widget stamping machine is worth. The different models are used so we can compare companies apples-to-apples. We do this regardless of whether their infrastructure is still functioning or not. This isn\u2019t a mistake: it is the right way to record the value for the purpose of comparison to other companies and for taxes. <\/p>\n\n\n\n But if I worked for that same company and wanted to sell it to a buyer, the considerations would be totally different. For example, depreciation for tax purposes is usually accelerated faster than actual wear and tear<\/a>. A car with a 15 year life, for tax purposes, has to be depreciated over five years. This is the government encouraging companies to build and buy more for political reasons. Depreciation is an expense that is deducted from income to arrive at taxable profit, and so accelerating it is effectively a tax break\u2014but one only companies that rapidly build and expand can reliably use. However, that same infrastructure, when being assessed for sale, is often worth more money than even its depreciated value. When buying or selling infrastructure, businesses take into account how much cash that infrastructure is generating regardless of its age. These differing considerations change the numbers on the page.<\/p>\n\n\n\n Therefore, a business infrastructure\u2019s value may swing millions of dollars based on the market and the needs of a business. A 1992 Geo Metro\u2019s value will not. That giant fluctuation is characteristic of assets which make money (like an oil pipeline or intellectual property) and assets which store value (like fine art or some kinds of real estate). The same holds true for the portfolios of rich people. The wealthy who depend primarily on their assets to sustain them (rather than wages) will have many, many large assets, and their entire net worth will swing millions of dollars simply based on their plans for the coming year.<\/p>\n\n\n\n Accounting is less of a science and more of a language with grammar, vocabulary, and ideological underpinnings. Recording something with a number, especially one with decimal places, gives a false sense of precision and objectivity to what is being quantified. Even in the \u201chard sciences,\u201d which also use numbers with decimal places and high degrees of certainty, there is a subjectivity. A human being chooses what to count and what the criteria is for counting it for an intended audience. That influences what number makes it onto the page. Accounting as a field is perhaps more aware of this subjectivity than most disciplines that work with numbers. Business accounting\u2019s grammar is set by an organization called the Financial Accounting Standards Board (FASB), which regularly publishes guidance on how to present figures for public consumption. Those standards evolve as part of an ongoing process of polling the industry and holding open discussions, along with formal appeals. <\/p>\n\n\n\n In short, accounting is an ever-evolving language that records the day-to-day workings of a life or a business. It is designed to describe the flow of assets, assess it, and make arguments about what should be done. It\u2019s not objective because it can\u2019t be. All I can do as an accountant is be clear about the purpose of why I am presenting specific numbers, what assumptions I am making, which set of accounting standards I\u2019m using, and how closely I hew to those standards.<\/p>\n\n\n\n We know shockingly little about the mega rich. Lists like the Forbes 400 are the only available resources we have on who is wealthy because governments don\u2019t really track individual wealth, and the wealthy themselves don\u2019t advertise. The first Forbes 400 was an immense feat of journalism<\/a>, digging through public property records in order to compile estimates. But roughly half of wealth is either privately held or in cash<\/a>\u2014not a matter of public record, and so unavailable to journalists. Even the public record is easy to evade. The rich routinely use shell corporations and trusts and elaborate tax evasion schemes. We gained a small window into that complex web of financial entities the wealthy use to evade taxes through the Panama Papers<\/a>. That leak, which comprised millions of documents, detailed many billions of dollars of schemes (legal and not) from only one law firm. One estimate says about 8 percent of the world\u2019s wealth is in offshore tax havens, and 80 percent is untaxed<\/a>. Because of the sheer complexity of where the wealthy keep their money and how it\u2019s accounted for, it can be literally impossible for a rich person to quantify what they themselves are worth. The richest person on earth may have no idea they are<\/em> the richest person on earth. The wealthier someone is, the more the relationship between value and currency breaks down, and so the title \u201cwealthiest person on earth\u201d may actually be meaningless.<\/p>\n\n\n\n On the scale we workers live, money seems very precise because it is<\/em> precise. For young accountants, that\u2019s the appeal. They come into adulthood with some experience of money. A Coke costs $1.75. If they\u2019ve ever filed taxes before arriving at school, the accounting was very straightforward. It was either correct or not correct, with an accuracy to the dollar. But all that lovely order and certainty falls apart outside the realm of small personal finance.This precision in the micro and lack of it in the macro comes down to the function of money.<\/p>\n\n\n\n The purpose of money is to establish an exchange rate between labor and finished goods. It allows capitalists\u2014not us, we are not the primary \u201cusers\u201d of the tool\u2014to compare worker to worker, good to good, investment to investment, and translate between them. It does a pretty good job of describing the lives of wage earners because that\u2019s what it\u2019s designed to do. Our hours worked, productivity, and consumer habits are all numbers in a spreadsheet. But any attempt to turn it back on capitalists is like an amoeba trying to look at a human being with a microscope\u2014the lens doesn\u2019t go both ways. A poor person\u2019s tax liability can be calculated to the cent. But when a wealthy person does their taxes, there are a number of arguments to be made about how much they own, how much they made, and how much they lost. Your net worth is a number. A capitalist\u2019s worth is a conversation.<\/p>\n\n\n\n That difference has material outcomes. Among the capitalist class, fraud is rampant. In 2001, Enron\u2014an energy and commodities trading company from Texas\u2014committed fraud on such a large scale (and more importantly, so undermined the credibility of the entire industry\u2019s figures<\/a>) that it prompted a reform of accounting practices. The Sarbanes-Oxley Act greatly tightened the standards on how figures must be reported outside of a company. The \u201clanguage\u201d of accounting became more standardized. Financial statements presented to investors must now be audited by independent, outside accountants. And while these reforms seem necessary given the stakes, I can\u2019t find firm figures either way on whether they helped at all.<\/p>\n\n\n\n I am not a fraud investigator myself, but as an auditor I was privy to how several fraud investigations turned out. Without exception, my experience is that whether law enforcement is called is a matter of how much money was stolen. Petty theft is always prosecuted. But if someone embezzles $10 million, a company tends to prefer to keep that person employed with them and treat it like a loan. Someone in a position to steal that much money has connections. <\/p>\n\n\n\nWhat Money Reveals (and What It Obscures)<\/h2>\n\n\n\n