-With interest rates low, now is the time to get that new car or light truck, because manufacturers and dealers are offering to lend the needed cash at interest rates often below 1%. Sales are on track to equal last years record.
-With interest rates low, and jobs not easy to come by, borrow from the government to finance a longer stay in college: student loans account for about 10% of total household debt, double the pre-crisis level.
True, US households owed $12.25 trillion at the end of the first quarter, and by continuing to borrow at the current rate are set to drive outstanding debt to pre-2008 crisis levels by the end of this year. But with interest rates so low, the cost of carrying that debt as a percent of household income is down from around 13 percent in 2008 to 10 percent now.
If its good enough for our government and consumers, it must be good enough for our corporations. So borrow money to finance acquisitions, or to keep shareholders happy by buying-back shares, thereby increasing earnings-per-share even if earnings are declining. So what if the rating agencies are unhappy about this increased ratio of debt to equity, so-called leverage. As indeed they are. In the 1980s some 60 companies had triple-A ratings; by 2000 that number had dropped to 15; now only two companies, Microsoft and Johnson Johnson, can claim that exalted status. But interest rates paid by double-A rated companies are only a sliver above their higher-rated counterparts, making the advantages of more borrowing outweigh the higher interest cost. At least up to the point where earnings are insufficient to cover interest costs.
Theres more, and better. In many cases borrowers dont really have to repay the lender, at least not in full, if it seems too costly to do so. Puerto Rico issued $3.5 billion in IOUs in 2014, and its governor announced that the constitutional obligation to repay was reinforced by a moral obligation to do so. That was then, this is now. With its debt and pension obligations at 172 percent of its GDP, Puerto Rico will default. Lenders, who apparently ignored 14-pages of warning in the prospectus, profess themselves shocked, shocked although they must have perceived a risk of non-repayment when they were able to command what at the time looked like a whopping 8.7 percent interest rate on the $3.5 billion loan.