Cheap Debt

Over the past several decdes, household debts have risen considerably over the past several decades. Even though households carry more debt, they don’t spend considerably more in debt repayments. Debt is cheap.

How cheap is debt? The figure below depicts US lending rates since 1960. Data come from the World Bank.1

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Debt was quite cheap in the early-1960s, with lending rates that stood around 4.5%. Beginning in the late-1960s, the cost of debt started to rise. By the 1970s, lending rates had roughly doubled during a period in which general prices were rising quickly and the financial system had trouble delivering credit to those who wanted it. Borrowing troubles eventually became a point of contention in US politics, which ultimately culminated in major changes to credit markets under the Reagan Administration.  Lending rates peaked at nearly 19% in 1981, a period in which the Federal Reserve’s actions to staunch inflation caused a major tightening in credit markets. Since 1981, lending rates appear to have been in steady decline, before reaching very low rates after the 2009 crisis.

 

  1. World Bank (2015) World Development Indicators Data downloaded June 2015 at http://data.worldbank.org/data-catalog/world-development-indicators

Download the raw data and Markup file here

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