In fact encryption is useless if you enter your password with your keyboard. If your computer gets compromised by a trojan it can read your password with a keylogger.
Part of the point of BitCoin is that everything is completely traceable. Check out blockexplorer.com. The "seller" does provide a uniquely identifiable piece of information with every transaction. That is your digital signature, which only the account's owner can create. However, the issue with wallet-stealing is that the private key used (in tandem with the public key or address) to create that digital signature is compromised, making the original account owner no longer the only account owner.
I wonder if it is possible to store my bitcoin private key on smart card.