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Over at The Economist, Buttonwood has an excellent piece on how we think about, and often are confused about, wealth. In particular, the article points to the dangers of confusing financial assets with real ones:

[F]inancial assets are not “wealth” but a claim on real wealth. If those claims multiply or rise in price, that does not mean aggregate wealth has increased. If a pizza is cut into eight instead of four slices, there is no more food to eat. If everyone sitting at the table is given shares in the pizza and the share price rises from $1 to $2, the meal will still be no bigger.

Which leads to further questions:

Not long ago the BBC transmitted a programme about credit-card use. One man said he felt “wealthier” because he was given a credit-card limit of £5,000 ($8,000). Of course, once he used the card he was poorer. Not only did he have to repay the £5,000, but he had to service a double-digit interest rate as well. Similarly those who buy an overvalued asset with borrowed money have not made themselves richer but poorer.

Thinking about wealth in this way is also useful when assessing rescue packages for the economy. Will these policies boost the amount of goods and services the economy produces in the long run, or will they have consequences that actually restrict economic activity? Does quantitative easing really boost wealth or simply create more claims on the same underlying pool of assets?

These are good points: there's the risk that the stimulus packages have artificially boosted the indicators of economic performance. In other words, we're being deceived into thinking the economy is recovering when in fact the resulting national debt and inflation is making us poorer in the long run. This is certainly the case at the micro level, where - as with the British man referenced above - the use of debt to fund purchases can be net negative.

But at the macro level the distinction between artificial and real wealth is not always so clear. One of the key arguments in favour of the stimulus packages was that they would foster market confidence. When market participants are more confident, they are more willing to spend - the more they spend, the more firms are willing to invest in products/services on which money can be spent. Through playing the confidence game, government spending can use the artificial sense of wealth to stimulate the production of goods and services, or "real wealth." More pizzas, if you will.

This is the theoretical argument, in any case. And it only works in the short-run, since sustained high levels of spending will not have the same impact on market confidence, and may actually reverse it. But whether this artificial-to-real wealth effect balances out the long run costs of higher debt & inflation is something which remains to be seen.