How Apple Became Safer Than the USA

Our states are spending money they do not have – and for 25 years it has been getting worse. While debt mountains grow, something bizarre is happening: some companies are suddenly more trustworthy than their own countries. What this means for your investments – and why the old security no longer works – you will learn in this article.

Nobody wants to talk about it. Or perhaps few dare to say it out loud: our states are losing the ground beneath their feet. While generations of politicians hold out their hands without ever closing them, the debt burden grows every year by millions, billions, trillions. The bill will come due eventually – everyone knows that. Only not when. And perhaps not for us, but for our children. For a long time, an iron rule applied in financial markets: government bonds are the safest investment imaginable. Safer than corporate bonds, safer than stocks. Yet this certainty is developing deep cracks. Growing debt mountains damage not only the economy but also change how safe government bonds really are. They lose their halo, and suddenly some corporate bonds no longer appear so risky. An uncomfortable truth becomes visible: the old promise no longer works.

 

GOVERNMENT BUDGETS

Twenty-five years ago, the global government debt of industrialised nations compared to economic output (GDP) was around 70%. Today, a quarter century later, it stands at over 110%. Politicians and parties came and went during this time – the debt mania, however, remained. Admittedly, there are significant regional differences in how heavily indebted each country is. Switzerland (37%) and Germany (64%) show relatively low debt ratios. Although a debt brake is not only positive – especially when investments in a country‘s digitalization loom. The development of government debt for superpowers USA (122%), China (88%), and Japan (236%) seems endless. Also because budget deficits continue to exist or will even increase in the future. Even tariff revenues of around USD 30 billion per month (at current tariff rates) will improve the USA‘s deficit of USD 150 billion per month only marginally. On the contrary, tariffs make imports more expensive and will likely reduce tax revenues in the medium term.

There is also little improvement on the spending side. Since the pandemic, government spending has increased significantly – in the form of loans, energy expenditures, defence spending, and inflation relief. After the inflation surge following the pandemic, interest rates were raised as a countermeasure in many places. But this also increased the interest burden significantly. These higher refinancing costs enter state budgets at different speeds due to different refinancing needs. In the USA, interest costs are now the third largest budget item and are expected to double again by 2035. In other countries like China, this development will follow but will not be averted. This leaves states with less and less room in terms of budget.

 

CORPORATE DEBT

35 trillion dollars. That is how much companies owe worldwide through bonds. For 22 years, this number has grown continuously – only in 2022 did it slow briefly. Since 2008, the burden has increased by 62 percent when adjusted for inflation. The USA dominates with USD 11.4 trillion in corporate bonds – over 60% come from industrial companies and technology conglomerates, not banks. China follows with USD 6.7 trillion, where financial companies carry over 60% of the debt. That is the opposite of the American model. Europe has its own pattern: in France, Germany, Italy, and Spain, the banking sector owes over 70%. In 24 of 38 OECD countries, the financial sector dominates with over 60%. That is a European phenomenon.

Particularly alarming is the ratio to economic power. In nine OECD countries, corporate debt exceeds the 50% mark of GDP. Since 2008, corporate debt ratios in 30 of 38 OECD countries have risen by an average of 9%. Only companies in Iceland, Ireland, and Portugal achieved substantial debt reduction. Emerging markets show a different picture: among the 20 largest, only corporate debt in China exceeds 15% of GDP. So far, no clear winner can be identified between states and companies – both have increased their debt. Although the absolute amounts and comparison to economic output are significantly more negative for government debt. Also because of the „old“ narrative that government bonds are the safest investment.

Compared to states, companies show a significantly smaller increase in refinancing costs. Almost 50% of all bonds worldwide cost 4% interest or less. The reason: long maturities and fixed interest rates protect old debt. This protection is historical. In 2000, only 10% of investment-grade bonds had such low interest rates. A complete upheaval in two decades. But new bonds are issued at significantly higher interest rates. Investment- grade companies pay an average of 3.5%, compared to just 0.9% in 2021. In a world with high debt levels and large refinancing needs, interest rates could remain elevated longer. Then the bill becomes ruthless: old debt matures, new debt expensive. The increase in total debt could accelerate – and suddenly the hidden burden becomes visible.

 

THE SECRET WINNERS

When companies borrow money, they pay higher interest rates than states. The reason is simple: they are riskier. A state can, if necessary, raise taxes – a company can go bankrupt. But government budgets have come under massive pressure in recent years. The result: a bizarre market situation. Today there are companies that borrow money more cheaply than the state itself. They pay less interest – no more. The normal risk premium has mutated into a risk discount. In Europe, the phenomenon appears among heavyweights like Louis Vuitton, L‘Oreal, Airbus, and AXA. These top companies sometimes pay less interest than France itself. Why? Because investors in uncertain times prefer to invest in safe, familiar names – and states increasingly appear questionable as borrowers. In the USA, it is a different story: there, the tech giants dominate this club. Apple, Microsoft, and Co. are ideal borrowers – hardly any debt, fat profits. They can practically borrow money at bargain prices.

 

SURVISTA

Government budgets are becoming increasingly fragile – and nobody seems to really want to solve the problem. Why? Because debt reduction is uncomfortable. Fewer expenses means: cuts to pensions, infrastructure, education. That costs votes and affects us all in our personal daily lives. Populism makes it even worse. Every party prefers to promise more rather than less. Who dares to say before an election: „We must save“? That is political suicide. So the most obvious thing happens: debt continues to grow – and markets start to notice.

The obvious idea: out of government bonds, into corporate bonds. But wait – it is not that simple. The problem: corporate bonds are already expensive. Valuations are at record levels – sometimes even more extreme than stocks. Of course, theoretically the interest spreads could fall further. But realistically? Hardly likely.

And more importantly: at today‘s interest rates, almost all of the return comes from the base rate – that is, from government bonds. The corporate risk premium? A drop in the bucket. You are simply not paid for the extra risk. But here is the catch – and it is an important one: yes, many companies are financially healthier than their states. That is true. But the comparison ends there: a state can, in the worst case, print money and settle its debts – with unpleasant side effects like inflation, of course. Companies? They do not have this back door. When the money is gone, it is gone.