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The risk is at some point, the bond market vigilantes are going to wake up in the U.S., like they did in Europe, pushing interest rates higher and crowding out the recovery.

What does "crowding out" mean, in the above sentence?

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This has a special meaning in economics and is off-topic really. You would get a better response on money.stackexchange.com –  z7sg Ѫ Jun 12 '11 at 21:17
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@z7sg - I don't believe "crowding out" has any special economics meaning, although economists do seem to love to use that term. –  T.E.D. Jun 13 '11 at 13:12

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"Crowding out" in this case means 'to prevent' due to the overwhelming number of other things. As in "crowding out recovery" due to "higher interest rates"

A vigilante is as defined:

A person who considers it their own responsibility to uphold the law in their neighbourhood.

I suppose, as a bond market vigilante, you uphold the law by doing things to the bond market, but in this sentence:

pushing interest rates higher and crowding out the recovery.

It is saying that the bond market vigilantes are going to increase the interest rates. This increase of interest rates could possibly mean that it is harder to recover, for people in debt.

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Picture a large crowd (say at a speech). Now picture a rather meek person who feels they need a good amount of personal space around them. As the crowd gets larger, and the more interested and aggressive folks push their way up to the front, the front ranks will become more compressed with people. Your meek person will find themselves moved further and further towards the back, until at some point they can neither see nor hear.

That is being "crowded out".

In the case above, what they are saying looks to be that buyers who would normally be there to facilitate a recovery will be effectively pushed out of the market entirely by "bond market vigilantes". I'm guessing the "higher interest rates" are being put forth as the active crowding agent.

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In this (economic) context, it means that higher interest rates are bad for a recovery. Higher rates mean more money going into bank deposits, less available for "real" investment.

There's only so much money to go around. If banks compete for money by raising rates, they "crowd out" other potential users of that money.

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