Bonds Are Not Forever: The Crisis Facing Fixed Income Investors

CHAPTER 3

DERIVATIVES GROWTH

In the early 1980s, some important trends were developing. America’s economic supremacy was reasserting itself under President Reagan following the economic turmoil and despondency under Carter. Interest rates were reaching their peak and beginning the 30-year-plus bull market that would bring them down to very low single digits within a generation. The bull market in financial markets would coincide with and most likely support a steady increase in the size of the financial services sector. The development of computing technology would transform the ability of financiers to develop products and risks previously unknown, to process volumes of transactions nobody thought possible.

History shows that these were the big themes driving economic activity and particularly finance. As one individual at the beginning of his career, I was scarcely aware of the bigger picture. That the New World held out greater potential than the Old was apparent, as it had been to many millions of other immigrants in past decades. However, the decision to enter finance was not the result of careful career analysis; it was instead an obvious choice to someone who’d grown up with a grandfather who was a banker, was reasonably numerate, and was drawn to trading based on success in a game during one economics class.

Britain in the 1970s was struggling with inflation, and my economics teacher in high school at that time, John Davies, devised a game to illustrate its effects. John ...