Neither a borrower nor a lender be;
For loan oft loses both itself and friend,
and borrowing dulls the edge of husbandry.
What is a bond? The first two definitions offered by the Merriam-Webster dictionary give us some idea: “something that binds or restrains” (fetter) and “a binding agreement” (covenant). A government bond possesses both characteristics. First, a bond is a covenant by the government to the holders of its debt to pay them back. Second, a bond ties the hands of government to manage its money in ways we will discuss later. At its basest level, however, a bond is nothing more than a loan.
How does a bond differ from a stock? If you own a stock, you have an ownership interest in the seller; if you own a bond, you do not. The private sector can raise money by selling stocks or bonds, but the public sector theoretically is limited to taxes and bonds because it cannot transfer an ownership interest in itself to another person. (This assumes, of course, that you do not believe political contributions are the equivalent of public sector stock transfers in which contributors buy ownership interests in their favorite elected officials – “a rose by any other name” as Shakespeare would say.)
How does a bond differ from a deficit? The West Virginia Constitution provides that the Legislature may not amend a budget bill “so as to create a deficit.” If the West Virginia Legislature approves a $100 million bond, does it not owe $100 million to bondholders and hasn’t it thereby created a budget deficit? Of course, it has. But just as we have been happy to construe public approval of a lottery as public approval for slot machines and table games, our political officials have been happy to ignore this inconvenient truth.
How does a bond differ from a loan? It does not. There is a borrower – the government, a lender – the bondholder, an interest rate – the coupon, a payback period – maturity, and even collateral.
A bonding transaction may be simple, but bonding’s rich cast of characters, as intriguing (double meaning intended) as any who inhabit Shakespeare’s Hamletonian world, are not. Tomorrow we will begin with an essential character in any bonding story: the lovely, fair-haired Ophelia.