The nation’s enormous national debt burden, which just passed $37 trillion, relies on the confidence of investors — whether individuals or nations — that buy Treasury bonds.
Take away the investors and the nation can’t finance that debt, at least not at a low interest rate.
The biggest problem with President Trump firing Bureau of Labor Statistics Commissioner Erika McEntarfer following a jobs report that indicated an economic slowdown is that it harms confidence in future government reports, and that could spark jitters among those investors.
That is why Michael Feroli, chief U.S. economist for JP Morgan sent a note to clients indicating that the unfortunate move creates “risks to the conduct of monetary policy, to financial stability, and to the economic outlook,” according to Yahoo!Finance.
Trusting the data
Without reliable data, investors cannot buy bonds with confidence. Feroli compared this to an aircraft with a flawed instrument panel, which he said was “just as dangerous as having an obediently partisan pilot.”
The July report revised the number of new jobs in May and June downward from earlier reports, which is not unusual to do as new data is received, as evidenced by a table on the BLS website showing revisions dating to 1979. President Trump, however, fired McEntarfer only hours after the report and has continued to attack her on social media, calling the report “rigged.”
The president may shout as long and as loudly as he wishes. It won’t sway investors who will be watching carefully to see whether future reports result in similar firings.
The United States has a long history of financial reliability. The dollar is the world’s reserve currency. It would take some doing to destroy that confidence, but it would take much more and be far more difficult to get it back.
Sounds like Greece
The New York Times aptly compared the firing to the practice that nearly destroyed Greece’s economy more than 20 years ago. Greece wanted to join the community of European nations using the Euro as its currency.
The nation’s budget deficit was 8.3% of GDP, but the government statisticians had reported it was 1.5%. There were several tricks employed, including what the BBC said was a scheme involving the government buying shares of the failing Greek railway, which were counted as financial transactions rather than expenditures.
“The Greek railway had more employees than passengers. A former minister, Stefanos Manos, had said publicly at the time that it would be cheaper to send everyone by taxi,” the BBC quoted Miranda Xafa as saying. She worked for an investment house in London at the time.
As the Times noted, the truth didn’t satisfy politicians. The government criminally prosecuted the statistical agency after it began issuing correct figures, which laid bare the nation’s woes, requiring many bailouts from other European nations.
Some politicians may hate bad news more than they respect the truth. But when it comes to economics and the mathematics used to understand the money world, the truth wins. Sadly, the cost, as seen in Greece, can be very painful and can last for decades.
Interest rates
The irony to McEntarfer’s firing is that a slower-than-expected jobs report may lead the Federal Reserve to lower interest rates in an effort to boost economic growth. President Trump has been railing on Fed Chairman Jerome Powell for declining to support a rate cut.
The stock market remains strong. Yet a number of economists blame Trump’s fluctuating tariff rates for slowing economic growth. As the Washington Post noted:
“Sectors such as manufacturing rely on global supply chains to provide raw materials and parts — steel, aluminum, machinery and so on — that they turn into finished products. When tariffs raise the costs of these input materials, businesses have an incentive to scale back. Then investment declines — and hiring slows.”
Tariffs
The constantly changing tariff rates and trade-agreement deadlines have affected overseas purchases. The toy industry, which typically has to order products and materials months ahead of Christmas, has scrambled amid uncertainty. This could portend further economic troubles near the end of the year.
You don’t need an economics degree to understand why measurements of economic growth must be conducted by statisticians who are independent from the people in power.
U.S. Treasurys are valued for their safety and reliability. A nation run by overspenders, meanwhile, relies on investors who believe in that reliability. Messing with that could result in dire consequences.
