Back to top

Analyst Blog

I want to take a longer view than most on the debt ceiling crisis. How did we get here?  It took us almost 100 years.

This story starts as the United States passed into WWI. The Congress before that time had to authorize specific loans or allow certain debt issues, one by one.   During WWI, with the need to fund massive military programs, what was called the Second Liberty Bond Act was passed.  This set a limit on the total amount of debt that could be accumulated.  This act and its related measures served the nation capably until the passage of a different act in 1974.

In 1974, the Budget and Impoundment Control Act was passed. This created the Congressional Budget Office, among other things, and started the process of reining in the budget process itself.  After the passage of this act, the debt limit was sort of rendered less relevant.

Dick Gephardt acknowledged this and in 1979 imposed what was known as the “Gephardt Rule." This is a parliamentary rule that deemed the debt ceiling would rise when a budget is passed.  This resolved the contradiction of voting to spend but not voting to fund the deficit funding part of spending.

This rule stood until the Republican Congress repealed it in 1995.  That was when Newt Gingrich took on President Bill Clinton with the tactic of a government shutdown.  Countries like Japan, Germany and the U.K. do not have this rule.  The only country that does is Denmark, and they do not see tactics like this.

???What you should understand by now is that this is NOT something envisaged by our Founding Fathers.  Nor do our sovereign peers use it widely.  A great majority of economists today advocate abolishing the debt limit altogether.  

The other thing to know is that we actually reached the debt limit on May 19, 2013 at  $16.669 trillion dollars.  We have been funding the U.S. government -- for five months -- on what is known as ‘extraordinary measures.’  

There really is no shoe that drops on October 17th per se.  What happens is the U.S. government must roll over $300+ billion in short term debt.  If few buyers step up, we are off to the races.  A rise in the short-term U.S. Treasury rates, the debt that becomes due for a rollover, has already begun.   That indicates buyers are spooked already.

Then, in a series of time running up to November 1, we have Social Security payments, Medicaid payments and interest payments on the existing debt to make.  There is a big nut due on Nov. 1 that comes to over $60 billion.

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
UTD THERAPE… UTHR 117.83 +28.51%
TRIQUINT SE… TQNT 20.67 +6.52%
RF MICRO DE… RFMD 12.47 +6.04%
VASCO DATA… VDSI 14.77 +4.68%
BANCO DO BR… BDORY 15.53 +3.95%