Saturday, March 13, 2010

Greek Financial Foibles Hit Mainstreet

The 6,200 miles between Athens, Greece and Sioux Falls, South Dakota failed to prevent recent Greek bond problems from clipping growth in this Mid-American community as well as in other agriculturally based areas. But how did this seemingly remote event affect businesses, farms and workers in the nation’s breadbasket?

First, investors, fearing Greek bond defaults, bailed out of the Hellenic nation’s sovereign debt funds selling Greek bonds and buying “safe haven” U.S. Treasuries. In order to buy U.S. Treasury bonds, investors converted their Euros to dollars driving up the value of the dollar relative to the Euro from $1.51 to $1.35 within two short months. This means that the price of an Omaha hotel room for Europeans rose from 66 Euros to 74 Euros per night. During this same time period, the price of a bushel of South Dakota corn, measured in dollars, plunged by 14 percent. That is, U.S. produced goods, such as corn, became less price competitive while European produced goods declined in terms of U.S. prices.

Likewise, this safe haven buying of U.S. Treasuries drove U.S. interest rates lower and Greek rates higher. However, this situation to be reversed in the months ahead due to Greece’s implementation of corrective taxing and spending policies designed to cut their deficit. At the same time, U.S. policymakers continue to ignore rising budget deficits and mounting debt that would make even Dionysus blush. Ultimately, U.S. citizens face the trifecta of higher taxes, inflation and interest rates unless federal overspending is halted.

Ernie Goss

No comments: