Part 1 -
(snip)"In the absence of derivatives the panic [caused by escalating interest rates = falling US T Bond prices - sic] would run its course and bond values, having absorbed the loss, would eventually stabilize at a lower level. In 1980 the runaway train [ interest rate derivatives - sic] could still be stopped before it derailed. But with a derivatives market of the present size such a panic would be tantamount to a stampede to sell up to $200 trillion worth of bonds which nobody wanted to buy. Nothing could stop this runaway train. The credit of the U.S. government would be ruined.
The problem is not that delivery of non-existent bonds is expected at the maturity of contract. The problem is that there will be an irresistible run to dump non-existent bonds when the underlying bond starts losing value precipitously, that is, when interest rates repeat or surpass their 1979-80 performance of entering stratosphere. In that episode, it will be recalled, the largest American banks became insolvent as the value of bonds in their portfolios collapsed, making huge holes in the balance sheet."(snip)



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