Well, I thought, Henderson the Fearless hasn't lost his touch.
"Bill, I want to run a small scenario by you." I sipped at my drink. "Say somebody'd just told you he was taking a massive position in interest-rate futures? What would that suggest?"
"Tells me the man's getting nervous. If he was holding a lot of Treasury paper, for instance, he'd probably figured rates were about to head up and he didn't want to get creamed. See, if you're holding a bond that pays, say, eight percent, and all of a sudden interest rates scoot up to ten, the resale value of that instrument is gonna go down the sewer. But if you've already 'sold' it using a futures contract, whoever bought that contract is the one who's got to eat the loss. You're covered."
"I'm not talking about standard hedging." I was wondering how to approach the specifics. "Say somebody started selling a load of bond futures naked. Nothing underlying."
"Well, thing about that is, the man'd be taking one hell of a risk." He swirled the cubes in his glass. "Anybody does that's bettin' big on something we don't even want to think about. Some kind of panic that'd cause folks to start dumping American debt paper."
I just stood there in silence, examining my glass. That was precisely my reading of Matsuo Noda's move. "But I can't think of any reason why anything like that's in the cards, can you?"
"You tell me. It's hard to imagine. The economy's like a supertanker. Takes it a long time to turn around. But if you want a special Henderson shit-hits-the-fan scenario, then I can give it a shot. Say, for instance, some Monday morning a bunch of those hardworking folks around the world who've been emptying their piggy banks to finance our deficit suddenly up and decided they'd like their money shipped back home. That'd create what's known as a liquidity crisis, which is a fancy way of saying you don't have enough loose quarters in the cookie jar that morning to pay the milkman and the paperboy both. The Federal Reserve would have to jack up interest rates fast to attract some cash. Else roll the printing presses. Or of course"--he grinned--"we could just default, declare bankruptcy, and tell the world to go fuck itself."
"Nobody would possibly let it go that far, right?" I toyed with my Scotch. "Particularly Japan. We owe them more money than anybody."