Is the Big Bust yet to come?

According to the Daily Pfennig which reports on the currency markets, "The Japanese yen is the best-performing currency in the world this week [26 February to 2 March]. The South African rand and the New Zealand dollar (higher yielding currencies that have benefited from the carry trade) are the two worst performers in the week."

That's bad news for the carry trade but, much more importantly, it is potentially extremely bad news for all those markets which depend for their dynamism to any significant extent on the "liquidity" which the carry trade provides.

That could mean a very wide range of markets. For example, it is likely that funds from the carry trade have helped support the housing bubble and, more recently, have been slowing the decline in the size of the housing bubble - in the United States and elsewhere. Some of the carry-trade funds may too have been taking up Treasury bonds and that makes an important contribution to closing the current US payments gap through an inflow of funds into the capital account.

These are important considerations. If the housing bubble deflates too rapidly, the impact will cause not only more and more mortgagees to default and lose their properties but also cause lending institutions to fail and the whole housing industry to enter what could be the most serious depression of all time, with an enormous loss of many of the jobs which have built up during the boom years of the recent past.

With that housing-industry depression will go, almost certainly, a dive in the consumer boom of the past many years. Deprived of the ATM that their overvalued house provided, consumers will be forced to mend their big-spender behaviour or face the disciplines of the bankruptcy court. This sort of outcome will not be uniquely characteristic of the United States but could apply also in such economies as those of Australia, New Zealand and the United Kingdom.

Meantime, shorn of support by the speculators in the carry trade and unable to find any longer enough funders for the chronic massive deficit in the United States balance of trade and payments, the once mighty dollar will risk going into what might increasingly resemble free fall. Instead of $600 to $700 to buy an ounce of gold, it might take $1,000 or $2,000. Oil might go to over $100 a barrel. The Euro might be worth $2 or more and it might take many fewer than 100 yen to buy a US dollar.

In other words, the whole financial world might be thrown into turmoil and it might be extremely difficult to restore any kind of stability. This will not necessarily be the direct result of a fall on the Dow or other American and global stock markets but rather because of indirect effects on other elements in the highly technical, sophisticated and complex structure of American and global finance.

How will any such developments be managed?

There have been hints that the stock-market volatility of recent weeks has alerted what is known as the "Plunge Protection Team" in the United States. This is an emergency "control" body that was brought into some kind of formal or informal existence at the time of the 1987 stock-market crash.

Still highly mysterious as to its composition, its terms of reference and its procedures, it is reputed to have been given a more formal status in recent years. America's Suicidal Statecraft says:

In 2001, George Stephanopoulos revealed publicly for the first time that a Plunge Protection Team from the United States Department of the Treasury, Wall Street and the Federal Reserve, brought together informally after the 1987 financial crisis to avoid a meltdown, had become more formal since and now stands ready to make whatever adjustments might be necessary to enable the “free” financial markets to survive a crisis and avoid a comprehensive collapse.

One sobering consideration is that, in the last ten years, those countries - the United States, Britain, Germany, France, Luxembourg, Switzerland and Japan - most likely to team together to meet a crisis have been joined by China, India, Russia, some Latin Americans and others who may not be so able or willing to bail out the old world of established finance capitalists.