As Stocks Die, Bonds Fly – Keep Ours Flying

“As stocks die, bonds fly.” That old investment maxim is getting some attention these days. The nation’s economic experts are divided as to whether the country is headed for a recession. That uncertainty has led to a solid AAA rating by both Standard & Poors and Moody's for US Treasury bonds – widely viewed by investors as being risk-free.

But there’s a catch. Moody's attached a note of caution to its triple-A rating: If the US doesn't get control of its entitlement programs, the nation’s bond status may be severely downgraded. Given this reality, it’s more important than ever that we continue our good work in rightsizing our federal real property inventory.

As a rule, bonds typically do well in an economic slowdown. Jeffrey Kosnett of kiplinger.com explains “When interest rates decline, the value of an existing bond increases. That's because the existing bonds make higher interest payments than do newly issued IOUs. Investors bid up the price of the higher-paying, older bonds until their yields are roughly equal to those of new bonds.

“That's why bond prices sometimes rally nicely during an economic downturn. Treasury bonds… are the best way to see this concept in action” Kosnett said.

But in a recent public radio report on American Public Media’s Marketplace program, correspondent Bob Moon quoted Cato Institute Scholar Jagadeesh Gokhale, who claims the problem is more urgent than Moody’s makes it out to be and that Social Security and Medicare entitlements raise significant caution concerning these bonds’ longer-term investment security.

“You know, the Social Security and Medicare administrations have estimated that the imbalances of these two programs amount to something like $90 trillion. So we're looking at multiples of annual output of the U.S. that has to be sacrificed to make these programs whole.” Gokhale complains the Moody’s seems to suggest there’s plenty of time to fix the problem, but he figures the country could save more than $30 trillion by acting now rather than later.

We’ve touched on this issue in “Managing Change” before. In our December 2007 edition, I quoted a 2007 summary report of the Trustees of the Social Security and Medicare Trust Funds, which warned that the Medicare Hospital Insurance (HI) Trust Fund will start to run dry by 2019.

By estimates from the Office of Management and Budget (OMB), surplus real property costs American taxpayers at least $130 billion annually in unnecessary maintenance and security expenditures.

By doing nothing more than getting our real property inventory under control, in ten years the US will have avoided $1.3 trillion in operating and maintenance costs. That’s more than one percent of Gokhale’s estimated imbalance in entitlements eliminated simply by getting our own house in order.

At VISTA, we’ve known for some time that sound real property asset management touches many other government initiatives. As a key factor underlying business processes, and arguably one of the government’s largest budget items, real property means money.

By keeping better control of our assets, we are not only improving the country’s standing related to entitlement programs. We are ensuring the best possible rating for our country in the new global economy.


David Baxa
President and CEO
VISTA