Learning the fundamentals

My students discussed the general concept of the current fiscal stimulus package in class. Some students favored the debt while many opposed it.

Japan is often cited as an example of a case where big fiscal stimulus did not help the economy significantly. Further, according the Washington Post, "Japan's economy likely contracted at an annual pace of more than 10 percent in the fourth quarter, analysts predict, reflecting the collapse in global demand that is battering the world's second-biggest economy. The Cabinet Office is expected to reveal Monday that gross domestic product in the October-December period plunged an annualized 11.7 percent, according to a consensus of market forecasts. That would mark the steepest drop for Japan since the oil shock of 1974 and far outpaces declines of 3.8 percent in the U.S. and an estimated 1.2 percent in the euro-zone."

Will the fiscal stimulus help in the U.S.? It is difficult to say with a high degree of confidence, mainly because of the lack of high ethical standards among the people in charge of executing the programs. One argument that cannot be contradicted is that the situation would become much worse if not for the intervention.

However, smart investors will pay attention to the fundamentals, which is that a fake house built on fake cards is going to crumble. The public is slowly realizing that there is a downside to borrowing. Further the high productivity gains due to technology has reduced the need for labor significantly in some industries. Over time, people will have to bear down and work hard for lower wages, and hope that the import of low priced goods will help them maintain a decent standard of living.
Now, that's a standard that is worth living up to.