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Globe and Mail
a day ago
- Business
- Globe and Mail
What if Elon Musk Is Right About U.S. National Debt? 3 Stocks to Buy if He Is.
The highly public spat between Tesla CEO Elon Musk and President Donald Trump over the One, Big, Beautiful Bill highlights an ongoing, decades-long debate over national debt. The focus of this article is to explore a potential scenario and suggest a way to invest in protection against it. That path is via life and retirement insurance companies like Prudential Financial (NYSE: PRU), MetLife (NYSE: MET), and Corebridge Financial (NYSE: CRBG). Here's why. Rising debt, rising debt servicing payments This chart gets to the heart of the matter. As shown below, the U.S. national debt has increased substantially, and so has the level of debt in relation to the country's gross domestic product (GDP). The shaded areas show recessionary periods, including the financial crisis of 2008-2009 and the pandemic, whereby GDP contracted and spending soared, so naturally, the debt-to-GDP ratio did, too. Still, the response in both cases was the same: more spending and more debt. US Public Debt Outstanding data by YCharts. Musk's view is that the national debt issue needs to be addressed as it's out of control and has the potential to saddle Americans with an unsustainable debt burden, which the bill will exacerbate. To be fair, the Trump administration's aim is not to increase the deficit as officials believe it will lower the deficit, through implementation of mandatory savings and promoting GDP growth. Again, this is not the place to debate that matter. However, what if Musk is right and the U.S. continues down the path of rising debt? Higher interest rates could be around the corner Rising debt levels and debt servicing payments imply more debt issuance. Simple economics argues that, unless demand improves, the rising supply of debt will lead to a rise in the price of debt. In other words, long-term interest rates will rise, and could be higher than the market is expecting. The chart below indicates that the market is comfortable with the matter and isn't attaching a significant premium (beyond the usual premium to reflect the increased risk of holding longer-dated debt) to long-term interest rates over medium-term rates. 10 Year Treasury Rate data by YCharts. But the market could be wrong. And while Musk's primary concern appears to be the difficulty of cutting rates caused by rising debt, it's only a short step away to argue that rising debt could lead to higher long-term interest rates. Stocks to buy in a rising rate environment The situation might not be catastrophic, but interest rates could be higher than anticipated. It's not an ideal scenario for stocks overall, as it makes them relatively expensive compared to bonds. However, there is one sector that could do well, namely life and retirement insurers such as Prudential Financial, MetLife, and Corebridge. These insurance companies pick up premiums from policyholders. The policies create long-term liabilities for insurers that they need to balance against their assets. As such, they tend to invest in relatively low-risk assets, such as government debt. While rising interest rates will reduce the value of the existing debt holdings, they will also increase the discount rate used to calculate the net present value of their liabilities. Consequently, as rates rise, insurers will be able to buy corporate bonds, mortgage loans, and government debt at higher rates. Here's a breakdown of all three insurers and the assets they hold in their general accounts, which are used to match their liabilities. Data sources: Company presentations. As indicated above, the assets in their general accounts are fixed income and relatively safe investments, giving all three companies good exposure to the theme of higher long-term rates. Stocks to buy? It's important not to be too alarmist here. The debt problem is undoubtedly an issue, but it's very hard to predict where interest rates, or total interest payable, will be. That said, if you are a young person worried about the public debt burden and the possibility of higher rates over your lifetime, then it makes sense to buy stocks in this sector as a form of (I'm avoiding the obvious word) matching your assets to your potential future liabilities from rising public debt servicing costs. Should you invest $1,000 in Prudential Financial right now? Before you buy stock in Prudential Financial, consider this: The Motley Fool Stock Advisor analyst team just identified what they believe are the 10 best stocks for investors to buy now… and Prudential Financial wasn't one of them. The 10 stocks that made the cut could produce monster returns in the coming years. Consider when Netflix made this list on December 17, 2004... if you invested $1,000 at the time of our recommendation, you'd have $664,089!* Or when Nvidia made this list on April 15, 2005... if you invested $1,000 at the time of our recommendation, you'd have $881,731!* Now, it's worth noting Stock Advisor 's total average return is994% — a market-crushing outperformance compared to172%for the S&P 500. Don't miss out on the latest top 10 list, available when you join Stock Advisor. See the 10 stocks » *Stock Advisor returns as of June 9, 2025
Mail & Guardian
22-05-2025
- Business
- Mail & Guardian
Public sector wage bill must be contained – but not by DOGE methods
Public sector wage bill 2023 The government of national unity (GNU) has experienced major ructions since the country's 2025 budget was aborted in February. Although the budget deadlock was about VAT, it is a symptom of a bigger problem affecting the fiscal sustainability of the country's public finances. This has exposed rifts between political parties over how best to increase revenue and cut expenditure. One of the biggest contributors to the government's precarious fiscal position is what the state pays public servants. The public sector compensation budget, or 'wage bill', has increased pressure on the government's available revenues. This has been constrained by sluggish economic growth and significant debt-servicing costs. According to the treasury, the wage bill has nearly doubled as a share of GDP from 1994 to 2024. It might be tempting to try to control the wage bill by cutting the public sector workforce in the absence of realistic short-term prospects for significantly increasing revenue. But this comes with considerable risks and disruption to service delivery capacity, which must be mitigated if not avoided entirely by affordability concerns. As the finance minister prepares to present a revised budget this week, the GNU must plan boldly in the medium-term to alleviate the fiscal stress caused by the wage bill. But it should not pursue indiscriminate cuts in core service areas and instead focus on eliminating wasteful and superfluous expenditure that has created structural imbalances in the public sector workforce. Recent events in Washington offer lessons about the dangers of acting boldly but irresponsibly when managing the cost of the public sector. Under the department of government efficiency (DOGE), the Trump administration has set about firing tens of thousands of workers. The highly controversial actions have drawn wide criticism. The US federal bureaucracy has, for years, endured successive rounds of efficiency and performance reforms under various presidents. The broad mission of DOGE is therefore not unusual. What is unusual is the increasingly malicious and disparaging image of a wasteful bureaucracy that the Trump presidencies have created. The aggressive methods employed by DOGE, which has instituted deep cuts across the US federal government workforce, spending programmes and entire agencies, have caused massive disruption in the delivery of services, and unleashed panic and fear among civil servants. Nevertheless, there are also pockets of bi-partisan support for the general principle of reducing waste, inefficiency and streamlining the structure of government. Does the underlying reform spirit in Washington, as opposed to its harmful methods, offer any lessons to South Africa in controlling its public sector wage bill? Trend Salary increases have been the biggest driver of payroll costs compared to increasing the total number of public servants. Although this has disproportionately benefited public servants in core service areas, like medical and criminal justice professionals and educators, it hasn't improved the overall capacity of these key frontline professionals, whose total numbers have stagnated in recent years and failed to keep up with the demand for the essential services that they provide. This problem was laid bare during acrimonious negotiations between public sector unions and government during Adopting a bold approach to alleviating the pressure of the wage bill can be implemented in ways that don't have to compromise the public sector's capacity to deliver essential services. This could include: Re-allocating spending which has fuelled growth in the number of workers in non-core areas of the public sector. This includes public entities and state-owned companies, as well as ministerial office staff and central government personnel working in policy planning, oversight and regulation Reducing excessive spending and reliance on outside consultants. This has been More aggressively (but creatively) reducing the number of government departments and public entities and forcing departments to rationalise their internal structures. There is already broad multi-party support behind cutting the size of government — President Cyril Ramaphosa But there may be little appetite in a more politically diverse GNU to embark on bold cuts to the machinery of government. Conversely, the GNU might provide political adversaries with a unique co-governing platform to finally reconcile their differences over the size of the state. Efforts to control the public sector wage bill should not be driven by an overzealous, indiscriminate and pernicious cutting of 'wasteful' bureaucrats, as the recent experience of DOGE has shown. Instead, the GNU should be seized by the magnitude of the fiscal crisis to act boldly but responsibly to create a more constructive pathway to balance affordability with capacity. VinothanNaidoo is an associate professor in public policy and administration at the University of Cape Town.
Al Jazeera
08-05-2025
- Business
- Al Jazeera
Will African nations ever be able to repay their debt?
Africa is a continent rich in natural resources with a young population. African nations in theory have the potential to transform their economies. But many of them are facing mountains of debt. Africa's external debt climbed to more than $650bn last year. More than half of African countries are either in debt distress or teetering on the edge. But credit restructuring is painstakingly slow, and many governments end up spending more on servicing their debt than on healthcare or education. The debt problem has plunged many nations into economic crisis with rising unemployment and poverty.
