It’s Not the Debt - It’s the Spike!

Key Concepts

• Total Public Debt: The gross federal debt encompassing treasury securities, intergovernmental debt, and programs like Social Security and defense spending.
• Momentum (Distance from Moving Average): A technical indicator measuring the price’s distance from its moving average, used to identify the rate of change in debt.
• Recessionary Correlation: The observed pattern of debt explosions coinciding with economic recessions and stimulus programs.
• Miner Performance (Gold & Silver): The relationship between the performance of gold and silver miners and the acceleration of public debt, with nuances based on market stretching.
• Rate of Change: The speed at which the debt is increasing, considered more critical than the absolute debt amount.

The Relationship Between US Public Debt, Recessions, and Market Indicators

This discussion, led by Kevin Wsworth and Patrick Kim of Northstar Bad Charts, centers on the often-misunderstood relationship between the US total public debt and economic health. The core argument is that the absolute amount of debt (currently around $37 trillion) is less important than the rate at which it increases. Simply put, a steadily increasing debt isn’t necessarily detrimental, but rapid acceleration is a strong indicator of economic stress and often coincides with recessions.

Historical Debt Trends & Recessionary Patterns

Patrick Kim begins by illustrating the historical trend of US public debt, starting from approximately $320 billion in 1966 and rising to the present $37 trillion. He emphasizes that despite this massive increase, there hasn’t been a singular “end of the world” event. However, analyzing the momentum of the debt – visualized as the distance from a six-quarter moving average – reveals a crucial pattern.

Specifically, significant “explosions” in debt consistently correlate with economic recessions. These explosions aren’t the cause of the recession, but rather a response to them, typically driven by stimulus programs designed to mitigate economic downturns. He points to several historical examples:

• 1969-1970s: Debt bottoms, then accelerates with stimulus during recession.
• Early 1980s: Debt increases, followed by a period of economic healing and a subsequent explosion during another recession.
• 2001 Recession: Debt explodes upwards in response.
• 2008 Global Financial Crisis (GFC): A significant debt explosion coinciding with the recession.
• 2020 Micro-Recession: Another debt surge linked to economic disruption.

The Significance of Rate of Change & Moving Averages

The key to understanding these patterns lies in the “rate of change” of the debt. When the debt is increasing steadily, the moving average catches up, allowing the economy to “breathe” and recover. However, when debt increases rapidly (an “explosion”), it creates systemic stress.

Kim highlights the importance of the six-quarter moving average as a benchmark. Historically, the debt’s distance from this average has rarely dipped below zero. Currently, the distance is hovering around zero with three recent touches, suggesting a potential shift in momentum and a possible upcoming recession. He identifies a potential breakout line based on previous patterns.

Miner Performance as a Leading Indicator

The discussion extends to the performance of gold and silver miners as a potential leading indicator of recession. While not a direct correlation, a general trend exists:

• Rising Debt & Miners: When the acceleration of debt increases (higher highs and higher lows), gold and silver miners tend to follow suit (higher lows and higher highs).
• Market Stretching & Corrections: However, this relationship isn’t foolproof. If miners become “stretched” (overvalued), they can experience a correction even during a debt explosion, as seen during the GFC. This is because stretched markets are prone to profit-taking during deflationary events.
• Current Signals: Currently, miners are “rocketing upwards” while the unemployment rate remains “sticky upwards,” suggesting a potential incoming recession. Kim anticipates a possible debt explosion to follow.

Debt vs. Purchasing Power & Long-Term Effects

Kevin Wsworth acknowledges the impact of rising debt on purchasing power – noting that more households may require two incomes to maintain the same standard of living. However, he reiterates that this doesn’t equate to an “end of an empire” scenario. The focus remains on the speed of change rather than the absolute level of debt. He draws an analogy to climate change, where gradual changes are manageable, but rapid shifts lead to catastrophic consequences.

Notable Quotes

• Patrick Kim: “It’s not the number that matters. It’s the rate at which it’s going up and the shock that that brings to the system.”
• Kevin Wsworth: “You think of it in terms of all sorts of different types of systems. They’re okay as long as things change slowly… But if you change it too rapidly, then you get rapid species die off and all that kind of thing.”

Technical Terms

• Gross Federal Debt: The total amount of money owed by the US federal government.
• Treasury Securities: Debt instruments issued by the US Treasury to finance government spending.
• Intergovernmental Debt: Debt owed by one part of the government to another.
• Moving Average: A technical indicator that smooths out price data by calculating the average price over a specified period.
• Distance from Moving Average: A measure of how far the current price is from its moving average, used to assess momentum.
• Momentum: The rate of change in price or debt, indicating the strength of a trend.
• Deflation Event: A period of decreasing prices.

Synthesis & Conclusion

The core takeaway from this discussion is that the US public debt, while substantial, isn’t inherently catastrophic. The critical factor is the rate of change in that debt. Rapid increases, or “explosions,” consistently precede and coincide with economic recessions, driven by stimulus programs. Analyzing the debt’s momentum using indicators like the distance from a moving average, coupled with monitoring the performance of gold and silver miners, can provide valuable insights into potential economic shifts. The current situation, with the debt hovering near its moving average and miners showing strength, suggests a heightened risk of an upcoming recession. This analysis emphasizes the importance of understanding the dynamics of debt and economic cycles, rather than simply focusing on the absolute debt number.