Fed's Balance Sheet Going To $20 Trillion

quoth the raven's Photo
by quoth the raven
Wednesday, Aug 02, 2023 - 22:44

Submitted by QTR's Fringe Finance

Friend of Fringe Finance Lawrence Lepard released his most recent investor letter this week.

I believe Larry to truly be one of the muted voices that the investing community would be better off considering. He gets little coverage in the mainstream media, which, in my opinion, makes him someone worth listening to twice as closely.

Lawrence Lepard (Photo: Kitco)

Larry was kind enough to allow me to share his thoughts heading into Q3 2023. The letter has been edited ever-so-slightly for formatting, grammar and visuals.

This is Part 1 of this letter, Part 2 will be published Monday.


As we discussed in our Q1 Letter, the US Fiscal position is very bad and the US is beginning to look like  a third world economy. 

The US Federal Deficit continues to grow as seen in the schedules below. A $2.25 Trillion dollar run  rate deficit is significantly worse than the $1.3 Trillion that was recorded in Fiscal 2022. This level of  deficit is unprecedented in an economy with low unemployment and theoretically no recession.  Naturally, we ask just how big the deficit will be if we have either a recession or a crisis? In the dotcom  bust, the GFC and the COVID shock, the deficit expanded massively.

Taking Garic’s math one step further, the US incurred a deficit of $1.3T in Fiscal 2022 (September). If  the current run rate is sustained that would imply an annualized deficit of $2.9 Trillion. 

Of course, one big driver of this deficit is the interest cost incurred by the Government itself. It is rapidly  approaching a $1 Trillion dollar run rate which means the Government is spending more in interest than  on national defense. As you can see in the schedule below, the Fed’s rate hiking campaign has been very  expensive for the US Government since a large portion of the federal debt is in shorter maturities which  currently pay ~ 5.3% in interest. As recently as September of 2021, many of these same securities had  much lower interest cost – as low as only 10-30 basis points. 

Looking at the chart above, we wonder: is there anything about this that looks remotely sustainable? We  are at that point in the movie where raising interest rates to fight inflation actually makes things (including  inflation) worse. Worse because deficits swell and will need to be monetized. 

Furthermore, the issue is acute because the US Government uses the short-term bond market to Fund  most of its debt. As the chart below from Gavekal Research/Macrobond shows, the Government needs  to roll over $6 Trillion of maturing notes in 2023 and $3 Trillion of notes in 2024. This does not take  into account any of the roughly $1.2 Trillion of bonds and notes that will be sold into the market by the  Fed if Quantitative Tightening continues. Nor does it account for the ever increasing US Federal Deficit  which will easily exceed $2.2 Trillion this year. 

In short, the US Government has some serious funding challenges particularly when we consider that  foreigners have been net sellers of our bonds since 2014.


On January 19, 2023 the US Federal Government hit its debt ceiling of $31.4 Trillion. Extraordinary  spending measures kicked in which allowed the Government to keep operating. This lasted until June  when Treasury Secretary Yellen informed Congress that a debt default was imminent if the ceiling was  not raised. 

After the usual political posturing, Congress did two things: (i) they agreed to place a two year cap on  spending increases for a small portion of the budget that amounted to only 7% of the total budget. (like  placing a band aid on a gaping wound); and (ii) they agreed to suspend the debt limit and to not replace  it with another figure until January of 2025. We do not think they have ever...(READ THIS FULL PIECE HERE). 

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