Friday, September 14, 2012

QE3 - my money is now worth less

As much as I may be happy to see the value of my investments get a near term push from the Fed's announcement of QE3 overnight, it also has to be remembered that what the Fed is effectively doing is creating more money without changing the "value" of the economy. Put differently, the amount of money chasing the same amount of goods and services has increased meaning that the money sitting in our bank accounts is now worth less when priced in goods and services. Of course, this rather simplistic observation ignores the intended hope that the stimulus will help borrowers with lower financing costs and encourage savers to spend more (among other things). As households continue to deleverage (unlike governments), it remains to be seen if this will happen.

It also remains to be seen how much of the new stimulus will filter through to the prices of consumer goods and services comprising the CPI (as the most commonly accepted proxy for inflation) and the extent to which the value of the USD relative to other currencies will be affected.

For my part:
  • I benefit by being a net borrower (the value of my outstanding mortgages is greater than the value of my cash and fixed income investments)
  • I benefit because the cost of servicing my floating rate mortgages is expected to stay low for longer
  • I benefit from the support given to the nominal value of my risk assets
  • I lose because I am paid in USD
  • I lose because most of my assets are denominated in HKD (which is pegged to the USD)
  • I lose because I expect the nominal cost of the goods and services which I consume to rise
I see no reason to change either my investing strategy or to change my retirement date.

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