Those of us hoping that the clear outcome of the last month elections would calm the market's nerves were bound to be disappointed.

While there were no hanging chads and few really close calls, markets are forward-looking and had anticipated the "shellacking."

More importantly, there are plenty of other things going on to make the market nervous, such as the Federal Reserve's latest attempts to help the economy by taking the untraditional steps of buying up bonds in the medium-term bond market.

The market was not surprised, as it had anticipated this, too, but there is sharp disagreement and uncertainty about whether this policy will work.

Does printing money create real wealth? Does paper money really matter? On the face of it, this apparently stupid question merits no response, but the lack of a clear answer to this question lies at the heart of the controversy over this latest attempt at "quantitative easing."

After all, if making a lot of green pieces of paper created real wealth, and was a solution to our economic problems, then government attempts to manage our economy would be easy. Governments would just print truckloads of it.

But even those of us who don't have a Ph.D. in economics can intuitively sense how printing paper can't solve all of our problems. It's not the same, for example, as being able to mass produce, more cheaply a faster engine.

If printing money was all that there was to it, poverty wouldn't exist, and Zimbabwe would be a nation of Warren Buffets.

Instead, in Zimbabwe today, there is a photograph of a sign, which has now gone viral on the Internet. It says: "Toilet paper only to be used in this toilet. No cardboard, no cloth, no Zimbabwe dollars."

Given the small role the Zimbabwean economy plays in the overall world economy, we may find this sign merely amusing (although to the citizens of Zimbabwe there is probably nothing funny about it).

Real wealth is when a factory figures out how to make 10 widgets with the same effort it used to take to make one. Now, the factory owners produce their product more cheaply and can sell them more cheaply, creating consumer surplus (the consumer can purchase the same item at a lower price).

Or, to use another example, think about how much time and effort went into creating light just 300 years ago - when people produced light by making candles from animal fat - and compare it to today, where we simply walk into a room and hit a switch. That is real wealth; that is productivity Money is irrelevant.

Long-term productivity is the key, not producing more pieces of paper.

But, on the other hand, nothing in economics is this simple. Money does matter, particularly in trying to smooth out the short-term fluctuations in the economy. Too much money and we get inflation; too little, and the economy can't function properly.

[ILLUSTRATION OMITTED]

What is the right amount of money in the economy, and can a group of highly trained but still mortal economists figure this out, tinkering like scientists from the office of the Federal Reserve?

It's Alive!

Although unlike the lone scientist, toiling in obscurity in a lab, this is a science experiment happening in real time and may have consequences that ripple, unanticipated, around the world.

QE2 - quantatative easing - is an attempt to smooth out the short-term fluctuations of the business cycle. It's not going to make a factory more productive, create real wealth, or re-train fired workers.

But it may ease the pain of people for whom this lingering recession still feels very real by increasing the circulation of dollars and slightly bumping up the inflation rate.

At the same time, the Simpson-Bowles Fiscal Commission is trying to tackle the problems that plague our country's longterm financial situation. If QE2 is a form of medicine being applied to our short-term economic problems, Simpson-Bowles is looking at the patient's long-term health, and trying to actually come up with a plan that makes mathematical sense - a plan in which entitlements are paid for without bankrupting the country.

QE2 is trying to solve our short-term economic fluctuations, Simpson-Bowles our long-term fiscal problems. However, the distinction between the short-term and the longterm may be a false one.

If people are forward-looking and make financial decisions today based on their expectations of economic conditions in the future, then putting forth a credible plan to solve America's future long-term fiscal problems may actually ease today's economic uncertainty more than an untested plan of pumping an additional $600 billion dollars into today's economy.

Author affiliation:

Fred D. Snitzer is chief operating officer in the investmentmanaging firm of Prudent Management Associates.