<== Site of the Week for 2011-12-19 ==>

DEFINITION: A bond is a form of lending preferred by governments and large companies. Instead of borrowing a set amount of money at a given interest, the bond issuer promises to paid bond holders a given amount of money on a set date. For example, imagine that I issues a note that promised to pay $1000 in five years. You might be willing to pay me $500 for that note.

Dr. Ed's Yardeni

Dr. Ed Yardeni coined the term "bond vigilante" in reference to big banks that use their massive bond holdings for political and economic clout.

Apparently, the term has captured the public's imagination. The term invokes the image of a sinister cabal of investors gathered in a dark corner planning economic revenge.

For the most part, bond vigilanteism is really just natural reaction to the news. When people feel their bonds might be at risk, they sell they sell their bonds at a reduced price ... flooding the market and making it difficult for countries to borrow.

Regardless of intent, when governments are highly leveraged, they end up having to make decisions to appease the bond market.

I like the term because it emphasizes that that debt financing takes away freedom.

Mr. Yardeni coined the term in 1983. It has come back into vogue to explain many of the political decisions in Washington and Europe.

I wish to pound the drum that we should be using more equity financing instead of debt financing.