Notes From Underground: US Debt, Never A Problem?

As we head into the end of 2022 we are reminded yet again of the sagacious wisdom of Louis Gave: Our investors pay us to ADAPT, NOT FORECAST. WALL STREET pundits have released a cacophony of 2023 predictions, and there’s always a race to ramp up all types of forecasts in an effort to make it to draw attention. The hills are alive with the echoes of Joseph Granville for the more outrageous the forecast the greater the chance for being elevated into the Pantheon of Oracles. If your off-the-chart predictions remain off the chart no one will ever remember, except SBF/FTX. The only certainty in 2023 is that the wisdom of MAO will be brought forward as IT TAKES A SINGLE SPARK TO START A PRAIRIE FIRE. There are several piles of dry tinder waiting to be lit. One of the most critical is the growing debt in the US that needs to be financed.

Last week former FED Governor Jeremy Stein said something of critical importance. From Bloomberg:

“It is astounding,” said Harvard University professor Stein, who as a Fed Governor in 2012-14 paid special attention, to financial stability issues. “If you told any one of us a year ago we’re going to have a bunch of 75 basis-point hikes, you’d have said are you nuts? You’re going to blow up the financial system.”

Interesting to say the least coming from this expert. The system didn’t explode but has the threat dissipated as the central banks believe they have done what they do best: BUY TIME? Hardly.

There was another story from Bloomberg on Monday that’s worth noting. Titled, “US Government Debt Spending Soars to $103 Billion For Two Months,” reporter Christopher Condon noted that interest costs in the first two months of the fiscal year have risen 87% from the same period last year. As the FED and other central banks raise rates to combat inflation the huge amount of PUBLIC BORROWING over the last decade will NO LONGER BE THE BENEFICIARY OF ZIRP/NIRP or negative rates. The political debate in 2023 will involve curtailing  a great deal of discretionary of discretionary spending as interest costs take a larger bite out of the budget.

In October, the Washington Post published an article by Allan Sloan titled, “With Rising Rates and Rising Debt, the Taxpayer Bill is Finally Coming Due.” Sloan said the interest on 2023 US debt could come in at  $580 billion, up from $399 in 2022 but if the FED keeps searching for its inner-Volcker well the projected interest costs rise ever more. Over the summer I issued a warning that if Volcker had to deal with a massive debt overhang, he could not have been Volcker. All financial problems begin with debt. I am not forecasting just getting ready to ADAPT.

***This week the FED, ECB, BOE, SNB and others have year end meetings. The FED will be centerstage Wednesday and will Chair Jerome Powell give a nod to a slowing of rate increases? The previous meeting had a somewhat less hawkish FOMC statement but was followed 30 minutes later with an extremely HAWKISH press conference as all asset classes retreated from their post-statement rally. (I referred to Powell as a man seeking his inner-Andrew Mellon as he sought to liquidate, liquidate, liquidate all ASSET CLASSES.)

The financial markets have spurned Powell yet again as the S&Ps are up 6% since the close of November 2, the EURO is up 7.5%, gold up 8%, BONDS up 6%. Why has the markets chosen to DISREGARD THE POWER OF POWELL? Will Jerome seek to follow the “wisdom” of Neel Kashkari and attempt to again deflate the recent rally in asset classes?

In my opinion, the most DOVISH FED OUTCOME would be for the FOMC vote to be split with at least three members voting for a slower approach to curbing inflation by rising interest rates. Brainard, Jefferson, Cook and Susan Collins could be potential dissenters as they are known labor economists and may be reticent to see a rise in employment and wages, but dissents would be the most dovish action. There’s much to contemplate but rising cost of DEBT is a serious political issue heading into a divided Congress in 2023. Be ready to ADAPT in lieu of outrageous forecasts.

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6 Responses to “Notes From Underground: US Debt, Never A Problem?”

  1. Hank Says:

    Thanks Yra for comments.

  2. mikegre2014 Says:

    Adapt? How exactly?

    • Yra Says:

      Mikegre—will depend on which macro/micro events become dominant and when the dynamic changes we will adapt yet again—-do you know which issues will be of primary concern for the market at this juncture?If DEBT becomes the primary focus I will be putting on steepeners and looking for a bigger down move in the dollar but I am not committing to any major position as of yet because I just don’t know—last February 24th I was very sure Russia wouldn’t actually invade and if so the invasion would be short similar to China invading Vietnam in april of 1979—–I have had to adapt to many twists and changes–and I have done this for four decades being one to change to the conditions on the global financial markets

  3. ShockedToFindGambling Says:

    Good article Yra… feels to me like the market is shifting it’s main focus away from the FED and toward the likely Recession next year…..I could change my mind in 2 minutes

  4. Trader 1 Says:


    New York Fed Williams indicated the need for 1.5% real rate. What do you think the FED adds to the Fed Funds Rate for the $90 Billion/Month QT in percent terms (.10%, .25%, etc..)

    What I’m trying to ask – with the FED funds currently @ 4.25% – 4.5% — What of you think the FED is adding to FED Fund Rate to take into account the effect of QT?

    • Yra Says:

      Trader–they used to comment on QT impact and maybe even the dollar but there has been not a word about conjecturing what the financial impact is

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