America: Not Greece, but Not Good Either

The bond market recently sent a quiet, but potentially economically deadly signal. For at least a brief window, Warren Buffett's Berkshire Hathaway (NYSE: BRK-A) was able to borrow money more cheaply than Uncle Sam. And Buffett was not alone, as other corporate giants like Lowe's (NYSE: LOW), Johnson & Johnson (NYSE: JNJ), and Abbott Laboratories (NYSE: ABT) also saw their debt trade at rates below the government's.

Granted, those companies certainly have better net cash flow and net income profiles than the U.S. Government, but that's not all that goes into determining interest rates. In fact, their ability to borrow at rates below the government is an extremely rare circumstance, largely because Uncle Sam has two powers that no private company will ever have:

• The power to print legal currency to pay back its debts
• The power to compel taxation to get the cash to pay back its debts

What's going on?
The U.S. is at risk of someday losing its coveted AAA rating, but that hasn't happened yet. The near-term blip has more to do with the massive increase in new Treasury borrowings compared with the market's ability to absorb that debt. That the situation only lasted a short while is a clear indication that, from a borrowing perspective, the U.S. government still reigns supreme.

In all likelihood, what'll really happen over time is that the market will adjust to higher levels of Federal borrowing by raising interest rates across the board. While the Federal cost to borrow will go up as a result, the government will still get lower rates than private borrowers, at least as long as its AAA rating lasts.

That probably won't end well
As my colleague Morgan Housel pointed out, higher interest rates on new borrowing may not mean much to the Feds in the near term. And indeed, if higher rates are all that happen, America turning into the next Greece is a long shot indeed. That said, higher rates can be devastating to private borrowers. That's because private borrowers don't have the luxury of printing currency or raising taxes to meet their debt obligations. Instead, private borrowers face a choice between:

• Paying their debt service from cash they earn
• Losing the assets they pledged against the debt
• Declaring bankruptcy

None of which is a particularly easy option in a period of rising rates. Indeed, if overall rates rise high enough in response to the continual increases in Federal borrowing, that can slow down economic growth. The risk to the economy comes as companies elect to use cash to pay down debt, rather than roll over maturing loans or borrow more to invest in expansion. The higher the rates on new borrowing, the tougher it is for anyone who can't print cash to justify borrowing.

At the end of the day, companies have to weigh the costs of their debt against the potential benefits they get by borrowing to fund their growth. And if they can't grow fast enough to cover their higher debt servicing costs, they won't borrow and won't expand.

All hope is not lost
Fortunately, not every company relies on heavy debt loads for financing its operations. Indeed, there are those who are capable of both profiting today and potentially growing their earnings in the future, in spite of having debt-light balance sheets. That list includes some of the companies that were recently able to borrow more cheaply than the government, along with other financially solid businesses, such as these:

With judicious debt loads, positive earnings, and both short- and long-term positive expected growth, they're well positioned to survive in a rising rate environment. So long as America's government rediscovers fiscal responsibility before it becomes the next Greek tragedy, these companies should do well, even if interest rates rise and otherwise limit economic growth.

In fact, the combination of financial stability and decent growth potential not only allows companies to borrow at reasonable rates, it also often makes them decent investments.

Own strength in turbulent times
At Motley Fool Inside Value, we're firm believers in owning companies like these that are built to last and withstand virtually any economic storm, and we have been since our 2004 inception. That's the reason some of the companies in that table were already on our recommended list, before that particular storm happened.

To see our complete list of recommendations or learn the other companies that have passed our tests of strength, click here to join us for your 30-day free trial. There's no obligation.

At the time of publication, Fool contributor and Inside Value team member Chuck Saletta owned shares of Lowe's and Johnson & Johnson. Berkshire Hathaway, Lowe's, and Wal-Mart are Inside Value picks. Berkshire Hathaway is a Motley Fool Stock Advisor choice. Johnson & Johnson and PepsiCo are Motley Fool Income Investor selections. Motley Fool Options has recommended a buy calls position on Johnson & Johnson and a diagonal call position on PepsiCo. The Fool owns shares of Berkshire Hathaway and has a disclosure policy.