The 2016 US Presidential election race was one of the most acclaimed discussions across the world. Tuesday 8th November 2016 marked the unexpected election of Donald Trump, the controversial Republican candidate who was repeatedly in the press debating his contentious and questionable policies. The global financial market reflected this and in turn fluctuated in reaction to the instability and uncertainty of the markets, whilst the bond market suffered severely (Irwin, 2016). This essay seeks to critically examine and analyse an article from ‘TheUpshot’, an online segment of the New York Times titled “The Market Is Betting Trump Will Bring Higher Inflation and Interest Rates” . It will also examine the key financial issues which are discussed within the article including, bonds, interest rates and inflation (Irwin, 2016).
Conboy describes journalism as ‘the careful construction of an audience for discussion of topical matters’ (2013,p.2-3) . It is communication which in theory invites discussion and in relation to the article, this is a prime example of a discussionary topic. “The Market Is Betting Trump Will Bring Higher Inflation and Interest Rates” encompasses the essence of this article as the author educates its readers on the speculations of inflation within the market and the effect which it may possibly have on interest rates and the bond market. Neil Irwin is a senior economics correspondent who has written literature on economics and the global financial crisis (Irwin, Burns & Applebaum, 2016), his extensive knowledge and understanding on such issues in the article can be seen as a benefit to the readers of The UpShot and therefore the article has an extent of newsworthiness.
A journalist is set to be the aggregator and the filter of information (Bull, 2016,p.4) , Irwin follows a readable style – which consists of a popular, newsworthy topic intertwined with economic themes of inflation, interest rates and the bond market.
The importance of newsworthiness is also attributed to the target audience of the article.
TheUpShot is an online segment of the New York Times, and with a reported 56% of Americans reading the news on a smartphone and 59% on a laptop/computer (“How Americans Get Their News,” 2014) it is daily publications like TheUpshot which receive a stream of online following and readers.
Within the article Irwin informs the reader of predictions of higher inflation, interest rates and the implications of this on the bond market as a result of the Trump presidential election. Irwin describes the bond market to be ‘a more reliable guide to what global investors believe the future will look like’ (2016,para.1). The relationship between the market rates of interest and length of maturity determine the market value of a bond (Faerber, 2009,p.11). Therefore if the bond markets are indicating a forecast of higher inflation and interest rates, then the American economic market needs to prepare for what could seriously affect the whole nation.
The article begins with a strong conclusive statement from the author, stating that “The Trump years are likely to feature higher inflation and higher interest rates than have prevailed in recent years” (Irwin, 2016). Inflation is the rate at which prices for goods and services rise in an economy over a period of time (Faerber, 2009,p.70). Interest rates and market inflation are down to the bond market. The inflationary potential of Trump’s planned tax cuts and infrastructure sent shockwaves through the bond markets, frightening investors at the prospect of higher than expected interest rates in the years to come (Irwin,2016). The expectation of interest rates in the economy sway bond investors, as interest rates rise, investors are less likely to invest due to the decline in future bond prices (Faerber, 2009,p.12).
In light of higher inflation and interest rates, bond prices have gone into reverse as investors contemplate on a period of political instability (Elliott, 2016). Antelo and Peon argue that the inverse relationship between bond prices and markets of interest provide reasoning as to why bond prices fluctuate (2012, p.53-54).
The length of time to maturity is key in this debate as this is what incites uncertainty within the market. Investors are looking for signs of changes in the bond market by interpreting economic and financial market indicators (Faerber, 2009,p.70).
Kahneman & Tversky theorised the ‘certainty effect’. This is where individuals underweight outcomes that are merely probable in comparison with outcomes that are obtained with certainty (1979,p.265). In this case looking at the current state of the US financial market – banks and institutions have been preparing for the worst and with fears of inflation, interest rates are set to rise whilst the bond market suffers (Faerber, 2009,p.69). Behavioural finance is a paradigm which considers that investors exhibit three psychological characteristics: loss aversion, biased expectations and asset segmentation. Asset segmentation is particularly relevant to this article as it looks at the larger uncertain losses to smaller certain losses – similar to the ‘certainty effect’ (Antelo & Peon, 2012, p. 117). It is the incorporation of economic and psychological variables which are all part of the decision making process (Antelo & Peon, 2012, p.118).
Irwin comments that if Trump’s proposal of large tax cuts and large spending on new infrastructure creates a stronger economic growth that this could drive prices higher (2016,para.7). With an increase in employment , this gives people jobs, enabling them to spend more money, giving back to the economy – turning a high economic output without creating inflation (2016,para.7). This draws the US (according to economists) near to its economic potential.Increasing labour productivity growth is required to sustain the GDP growth of America. Kapon and Tracy illustrate that potential growth is based on ‘output of worker per hour’ and that the current state of population growth will continue to pull down the overall contribution of labour input (Kapon & Tracy, 2011). Therefore Trump’s investment plans may be something which the American economic market and people will benefit from.
Irwin has articulated an article with a readable style for those not well informed of the economic market and its terminology. He provides an unbiased explanation of arguments of speculation of the financial market in the wake of Donald Trump’s Presidential election. The elements of speculation regarding Trump’s surprise victory and what its implications are, spark debate and further research of readers and particularly economists as to what could possibly happen. Irwin manages to give an explanatory insight into the ways of which politics can not only reshape foreign and domestic policy but also have a genuine effect on reshaping the financial system.