QE II - the personal impact and USD debt instruments

There has been plenty of coverage on the impact of QEII on the economy, on currencies, on stocks, on bonds, on commodities and so on. At a more personal level, how does it affect me?

The positives

1. the value of my investments went up: stocks appreciated, commodities appreciated

2. the risk of deflation (both longer term and shorter term) has been reduced. As the holder of a portfolio of risk assets, deflation would be a very bad thing for me

3. the decline in the USD and corresponding decline in the HKD (which is pegged to the USD) boosted the value of my non-USD/HKD denominated assets

4. the HKD peg to the USD is expected to create an influx of hot money. Combined with the continued low interest rates in the US, this means that it is likely that I will continue paying very low nominal interest rates and negative real interest rates for some time

The negatives

1. I am paid in USD: the decline in the USD amounts to a pay cut

2. the HKD peg to the USD means that there is an expectation of more money flowing into Hong Kong (among other places). Not only does this create the risk of an asset bubble, but it adds to inflationary pressures

3. some of our household spending is denominated in currencies other than the USD/HKD. QEII effectively means that the cost of overseas holidays, imported wine etc etc have increased. Not all of these costs are captured in general measures of inflation

4. the continued debasement of the USD (the world's largest currency) increases the risk of longer term inflation significantly

5. I am still accumulating assets. The increases in nominal prices of real estate, equities etc makes it more difficult to acquire assets at attractive prices

6. continued low nominal interest rates combined with increased inflationary expectations make bonds even less attractive going forward. Diversification across asset classes is now harder. This means that the risk to the private portfolio has also gone up

Conclusions

All in all, in the short term I am clearly a net beneficiary of QEII. However, over time the on-going effect of a pay cut and higher inflation (whether or not captured in CPI data) will erode those benefits. Also, the risks to my retirement have also changed - whether for better or worse being a complete guessing game.

Random thoughts on USD debt instruments

While there is no limit to the amount of money the Fed can create, there have to be limits to the amount of money investors are prepared to tolerate. Give (i) the ultra low interest rates for USD denominated debt instruments (ii) a Fed which is very publicly attempting to create inflation and (iii) the widespread belief that the US wants a weaker dollar, why anyone would want to buy USD debt instruments is totally beyond my understanding. The only justifications for buying that asset class in isolation are either a belief that the USD will strengthen or a belief that there will be a deflationary environment going forward.