Saturday, May 22, 2010
Where is Eugene Fama on Portugal?
"More than a decade ago, the low interest rates that came from the euro's imminent creation were supposed to propel investment and efficiency gains. Instead, they created the appearance of prosperity. Underlying problems, such as low productivity and a bloated public sector went ignored. ... The cautionary lesson from the euro zone's 10th-largest economy--that monetary union and a common currency are no substitute for a skilled and productive work force and budget discipline--is apparent here amid the once-busy clothing factories and fabric mills in the hills outside the coastal city of Porto", my emphasis, Brian Blackstone at the WSJ, 28 April 2010: http://online.wsj.com/article/SB10001424052748704471204575210533489119748.html.
The Los Angeles investment group I was a member of debated the euro's significance when it was created. My opinion was the euro was not important. That over the long run, only real forces matter. This reminds me of a tenet of "Fama-Miller" finance, investment and financing decisions are separable. Why be surprised Portugal's new numeraire did not affect its real economy? The US should study Portugal's plight. Zimbabwe Ben can print all the dollars he wants. Without government spending decreases the US will continue capital decumulation and American living standards will fall. This article was titled: "Euro Masked, Amplified Portugal's Problems". Amplified? How? If a carpenter measures wood in meters instead of yards, how is that a problem?