first majestic silver

A Ring of Dominoes

June 9, 2001


Some centuries ago there was a very simple little piece of doggerel that was widely sung in England. It went like this:

Ring o' ring o' rosies

A pocket full of posies

Hush hush

All fall down

Even today it is still on occasion sung by children as accompaniment to a simple little game where a number of kids would hold hands and skip along in a circle singing this song. At the final line they stop skipping and 'all fall down'.

Of course, originally the song may also have been sung during a similar 'game', but it was not an occasion for merriment. On the contrary, the piece of doggerel has its origin in the Great Plague that tore through England in the mid 1600's, felling thousands of people in the growing cities of the time, like London, and more in the rural areas.

The song contains a symbolism that describes prevailing features of the Plague – the red 'rosettes' that form on the skin, mostly on the sides and under the arms, when one has been infected. The flowers and herbs people carried in their breast pockets, close to their noses, in the belief that this would ward off the "evil humours" in the air that was presumed to be the cause the disease.

Then follows the "huff huff" kind of sneezing or wheezing that accompanied the further progress of the disease. Finally there is the so descriptive "All fall down", when the Plague has become terminal.

It would seem from a studied glance around the world that it is time for a modern version of this widely known song – one that might go like this:

Ring o' ring o' dominoes

Pockets full of dough

Crash crash

All fall down

Like the original, it might even become quite popular in the months and years ahead, and, for very similar reasons, singing it will not be to celebrate a joyous occasion, but to remember a time of great hardship and, this time around, financial death for many.

An entertainment – now on the global stage

All children who have played with a set of dominoes must have at one time or another placed them in a row, suitably spaced apart, and them knocked down the first in line, which then topples the second, and it in turn fells the third, and so on to the end of the line, when all the dominoes are toppled. In this simple version of the arrangement, there are always two "prime" dominoes, the one at each end of the row. Either of these can trigger the collapse of the whole row, if they should be tipped in the right direction, while any other domino that happens to fall only flattens part of the row..

Some children progress to a more interesting arrangement, where they place the dominoes in a circle. Then each domino becomes prime, so to speak, with the ability of toppling the whole set. Any one of them can be touched, by a careless finger, say, and if it should fall, in either direction, so does all the rest.

As intimated by the updated version of the song, a case can now be made that the global financial system has come to represent such a circle of dominoes. Unlike real dominoes, though, the 'dominoes' in this instance are not exact copies of each other, but a diverse collection of financial systems and variables that make up and describe the financial world in which we live.

Where the child playing with the set of dominoes is having some fun while learning a little about basic physics and, at a deeper level, about the relationships and reactions between things, this other set of dominoes is likely to be no cause for fun at all. Yet, in due course it can become an even more pertinent and elucidating, if painful, learning experience than playing with real dominoes can ever be.

Dominoes in the real world

Over the past decade or two, there has been a major shift to globalisation – a process of opening borders, dropping trade barriers and inter-linking financial and other systems in a belief that we can establish a unified global economy that would offer great advantages, hopefully to all, while being more amenable to the financial engineering that has become the trade mark of the modern Central Bank.

By doing so, we have shifted the 'dominoes' on the globe until, now, they form a near perfect circle. Earlier, when the dominoes stood widely dispersed, hither and yonder, one or even a couple could topple without really upsetting the whole lot. Of course, unlike children's playthings, not all global dominoes are of the same size; some are very large and others are quite small. At the time when they were widely dispersed, the collapse of a smaller domino would have very limited effect on the rest, while when a major domino toppled, it would send out ripples that could be sufficient to bring a few others down. But not all of them. Some dominoes always remained standing to provide islands of stability, to provide assistance to the fallen and from where recovery could take place again.

The Great Depression in the US affected most of the Western economies, because by then there were some strong links between all of these. Yet not all of them suffered to the same degree, as some were close enough to acutely feel the ripples and to topple as well, while others more removed only came close to doing so. Many more remote and less tightly linked economies – of whom a good number were in an early emergent stage and thus more self-reliant – were largely passed by as the US and related economies took a nosedive and people there and elsewhere suffered, including the pain of disillusionment.

Today, with globalisation, things are different. The dominoes are now aligned in a near to perfect circle and the risk of a complete systemic collapse of the whole ring has been magnified. In 1997 the problems in SE Asia – relatively minor economies that in the past would have had little real effect outside their immediate circle – caused even Wall Street to hesitate briefly in its rush to new highs. And at that time the global links were still being forged, while the US was still sound. Subsequent shakiness in South America and then in Russia caused larger trembles on Wall Street and required a steady hand to settle US markets down before a crisis could erupt to spread the new 'quake even further.

It is important to remember that at those times the US economy and its financial markets and those of its close partners were rampant, thus providing a degree of stability to the whole ring. While the US remained standing, others might tremble, but need not fall.

Now times have changed. Nasdaq and some recent trends in the economy have shown that the US domino is no longer as stable as it once used to be – its foundations have been eroded by recent and continuing market excesses and in terms of inherent stability it no longer resembles a reasonably stable domino, but is beginning to behave more and more like a pencil balanced to stand on its base.

This means that it is becoming increasingly susceptible to tremors from elsewhere in the world – and to internal wobbles – and soon its collapse could be triggered by what at first glance might appear to be some insignificant event way out on the other periphery of the circle. Now, even a small domino that is toppled can be the start of a total collapse.

When that happens – some optimists might say "If" – the fall is likely to be very great and the subsequent decline long lasting. This time around there will be no significant "islands of stability" where some dominoes remain standing to seed the new recovery and to provide assistance to those that had fallen.

The Dominoes

One could list the countries and national economies that have become fragile enough to either trigger such a progressive collapse around the ring or to easily succumb to a tremor elsewhere. But that would not really serve the purpose of directing the observer's attention to those factors – the shaky financial systems within these economies and the global system – that could warn of the imminent tragedy.

There are also some large dominoes that, in principle, would not be easy to topple and, if they all remained standing following some disturbance on the global scene, could provide a measure of stability to the ring of dominoes so that the damage can be contained and emergency measures implemented to try and rescue the situation – as could be done in 1998 when South America and Russia shook the financial markets.

In principle, these would be the major economies of the world – the US, Europe, Japan, Great Britain and perhaps a few others. But if one considered the dominoes at another level – not as national economies, but as major systems that conceivably could be at risk over the near term and whose implosion could almost unavoidably trigger the collapse of the whole circle – the focus can be narrowed down.

The key members of this alternative group can be seen as the LARGE DOMINOES:

  • The US Dollar
  • The US Treasury and debt market
  • The US Property market
  • Wall Street
  • Japan's financial system

These are the Big Five. One should include a sixth, gold, not because it is so important of itself, but because it acts as a seismograph that informs us of the perceived stability of the Big Five. Any sustained increase in the gold price would reveal hidden tensions and fears that something could be brewing underground and the promise of any sudden tremors that could eventually send all the dominoes tumbling. The effect of a steep rise in the gold price – either on the players who have gone massively short, or because a rising gold price in turn gives rise to imminent panic in other quarters, or both – can of itself trigger events that send the whole circle tumbling.

And in the precarious gold market of today, there are factors that could send gold flying – such as if the well of physical gold used to contain rising demand and thus support further shorting of gold should dry up and leave gold at the mercy of natural supply and demand.

This is not intended as a detailed analysis of these Dominoes. Enough has been written elsewhere on all of the above to satisfy any reader who would like to know more about the condition of the Big Five (perhaps requiring some real digging to find out relevant facts about the true state of the secretive Japanese financial world).

What is clear is that the US Dollar is probably the largest Domino of all. Its strength over recent months has helped sustain the whole collection of US Dominoes, drawing in foreign funds that are essential to counter the trade deficit, to help maintain a high level of liquidity in US markets, to draw in support for Wall Street and the Treasuries and – very important – to keep up the pretense that all is well in the best of all possible worlds.

The fact that a strong dollar also does its little bit to help keep the gold price in check and avoid "real shakiness in the traces made by the global seismograph" is a bonus.

Many commentators believe the US dollar is overvalued and that it could begin to decline at any moment. Yet, the dollar is not a domino standing in isolation, one that remains standing or tips over purely of its own instability. Given that perceptions of a potential weakness in the dollar are already widespread, any tremors in one of the other Big Four could trigger a rumble that brings the dollar down to size – and by doing so, sets off an escalating sequence of further collapse, which would include the rest of the Big Five as well as the remainder of the dominoes on the global stage.

Wall Street is again perilously high, given the uncertain prospects for the US economy. A steep and sustained fall on Wall Street could frighten off foreign investors and prompt some of them to repatriate their funds. This would hit at the dollar and then, by extension, the rest of the dominoes as well.

US Treasuries have been a safe haven for some time, but the long end has been showing a few quivers of uncertainty of its own. The risk lies perhaps more in the secondary debt market, where the potential for defaults on interest payments is rising and which could precipitate a major crisis of confidence in the debt market and the banking system. Then, in due course, Wall Street and the dollar would both suffer from their own instabilities.

There are some indications that the strong US property market has been and perhaps still is the mainstay that have prompted sustained consumer spending. The rate of refinancing of mortgages has been very high since late 2000 and can be presumed to have provided much of the cash in consumer pockets that found its way into the market in search of the many discount bargains on offer. If the mortgage rate should begin to rise, this horn of plenty could suddenly run dry and begin a sharp decline in consumer spending – with sooner or later disastrous results for Wall Street.

Early indications that the property market in the US could be peaking are already being reported. Tremors from this domino might require some time to build up and have full effect, but, when it finally tumbles, its knock-on effects on the other US dominoes could be just as devastating, and then the rest of the circle also goes down.

Japan has often been described as the world's banker. The problem with bankers is that on occasion they have to call in loans – an experience that can be very traumatic, if not financially fatal, to the debtor who receives such a summons. It is widely known that the Japanese financial system is still in tatters following the collapse of their Bubbles in 1990 and that their economy is stagnant because its citizens are uncertain about their future and therefore have a Yen for saving as much as they can. (Could not resist that one!)

There is cause to believe that the true miserable state of affairs is much worse than so far acknowledged and, if the new premier sticks to his promise to scratch it all open, the things that creep out of the woodwork could prove to be earthshaking. Enough to send all the dominoes tumbling down helter skelter.

Even before the loans get called in.

Even if just one of the larger Japanese banks should decide to come clean and announce how truly bad that situation of its unperforming loans really is could begin an erosion of confidence among the populace and investors that affects the whole Japanese financial system and then that of the rest of the world.

Ad to that recent reports that the Japanese bond market – having gained about 30% in about 9 months to yield less than 1.3% - could be in for a shake up; particularly if it turns out that the liabilities of the Government are much greater than the known 130% of GDP, or thereabouts, prompting another downgrade from the ratings agencies. That would really rattle a few of the bones on the table and could even topple one or two of them!

Lastly, gold. While it is really a minor domino on the global domain, despite its much vaunted seismographical role – mostly in years past – a steep rise in the gold price would firstly stimulate much uncertainty in certain markets, and even the fear that there are problems brewing underground of which only a privileged few are aware, problems that could suddenly result in an eruption or a financial quake that could cause some of the major dominoes to start shaking too much for comfort.

Secondly, a steeply rising gold price could of itself create a few troubles of more than a mere discomfort rating on the financial Richter scale for some of the major players in the global financial markets – sufficiently so to have all kinds of unpleasant repercussions for the dominoes that really matter, including the biggest one of them all, the US dollar.

For this reason alone, gold merits discussion here if not actual inclusion under the list of the most important dominoes in the circle.

The lesser dominoes

It is blatantly obvious that if one of the major dominoes should topple over, so would the others too. Even Japan would suffer a severe crisis if the Yen should become too strong in reaction to a weak dollar and if the Japanese export market to the US withers away under a lasting economic crisis there.

But there are a good number of much smaller dominoes also standing in the circle. In years past, the degree to which periods of instability in these dominoes had the potential to affect the Big Ones, could be measured by what happened to the gold price. If a local border war or some other military or economic or financial flash-point posed any risk to the then somewhat isolated major systems, the gold price would have warned that such risk was mounting. Recently, of course, gold has failed to react even to events that in the past would have seen the gold price jump as evidence of serious concern.

Now that the linkages between the elements of the global system has tightened, with the dominoes nicely lined up behind each other, gold is no longer needed to act as messenger of coming disaster. Tremors are transmitted directly along the base line of the dominoes and each one of them can feel directly that something is going wrong, as had happened in 1997 with SE Asia. It was even worse in 1998 when Russia caused all kinds of trouble to place some financial institutions in jeopardy, thus triggering serious troubles for Wall Street that could barely be averted through determined action by the Fed.

In this new regime, a collapse of even a minor domino can have far reaching results. One could almost draw an analogy on Chaos Theory to say that it might happen that a dealer on the Thai futures exchange defaults on a transaction and a week later the Dow falls 2500 points on the day the resulting financial storm hits – with increasing amounts of financial debris littering the path of the storm into Japan, across the Pacific and America to New York, and then onwards to wreak havoc in Europe..

For that reason, it is advisable to become aware of the smaller dominoes and what damage they could bring about – if not directly, then by their action on other small and then larger dominoes until the whole circle eventually comes cascading down.

A list of these, in no particular order, consists of:

  • Bush Administration – president Bush feels compelled to warn the US that the Clinton years have steered the economy unavoidably into a recession, before it is so late that his administration carries the blame for anything that goes wrong. And, of course, this then becomes a self-fulfilling prophecy
  • Inflation – news that inflation has reared its ugly head even further, either in Europe or in the US, or both, changes perceptions and expectations. US Treasuries are in retreat, with corporates leading the way. With US corporations largely excluded from Wall Street and the banks as sources of funds, and now finding the door being shut in their faces in the bond market as well, go the Chapter 11 route, either before or after they default on interest payments on existing bonds
  • The Howe court case goes into discovery – the reactions by the respondents are as good as breaking news on the true state of affairs and gold takes off. Leasing is curtailed, as above and with the same results, but for a different reason
  • A cascade of profit warnings – from some major counters in the Dow and S&P 500, with real glum outlook for the next year at least, throws investors on Wall Street into a panic. The rumble on the floor of the NYSE as the Dow Express takes the low road soon extends to affect the Nasdaq and markets in England, Europe, Japan and elsewhere. Repatriation of foreign investor funds attack the dollar and soon foreigners are in full flight with whatever profits they could rescue, leaving US markets in ruins
  • War – there are a number of possible flash-points that could escalate into full out war. Given the precarious situation in many markets, such an event could trigger danger signals in some of them that would then feed on their own energy, toppling a few of the smaller dominoes, until a full collapse occurs. The situation around Israel is one such that has been quite prominent for some time, and could become a conflagration if the Arabian peoples should manage to unite in an all out attack (again)
  • Oil and gas – energy is developing as a crisis now almost unique to the US. But any worsening in the situation in California and elsewhere in the US could be a first step on the road to economic troubles that would be impossible to disregard. Add to this the possibility of embargoes or the consequences if a majority of large producers in the Middle East and elsewhere requested payment in Euros instead of dollars. (At almost 80 million barrels a day, that amounts to a lot of dollars being used for oil – if that were to be switched to Euros the US might be paying a much as $400 million per day for oil imports. If this should happen, just think of the ripples of excitement among the circle of dominoes as they wait to see which will be the first one to fall)
  • Remedial activity – actions by US authorities to remedy the worsening situation could of itself create severe imbalances in the financial system and thus give rise to a crisis of credibility among largely foreign investors. For example, if the steep growth in US money supply eventually convinces investors that monetarists and Austrians might be proven correct and that inflation is due to take off with a vengeance, the cure may trigger the catastrophe that was being avoided. Que sera sera

Add to this list any of a series of natural disasters that could just happen at this most inopportune time and really rock the markets – again with widening and more ruinous effects than justified by the magnitude of the initial event.

It is left to the reader to unravel the various and perhaps convoluted threads that link these minor or lesser dominoes to each other and to the Big five that were discussed above. It should not take long to discover that these lesser dominoes definitely has the capability of toppling even the giants among their kind.

And that the resulting catastrophe will be global.


This essay presupposes a certain unsteadiness, a growing inclination to instability and dis-equilibrium, among the dominoes.

That basic assumption could be wrong.

Perhaps the US dollar is not really over-valued and just looking for a reason to search out its proper level. Perhaps US consumers still have pockets full of cash with which to keep on buying all the capital goods that their hearts desire – and which effort can keep the US economy growing at a suitable rate to ensure sustained increases in corporate profits, and thus justify the near stellar prices being paid for the Dow and S&P500 stocks.

Perhaps California will successfully address its electricity problems, without precipitating a crisis among suppliers of natural gas or exporting their problems to their neighbouring states and Canada. Perhaps the Israelis and Palestinians will finally settle their differences around the negotiation table and peace will break out at last in the Holy Land.

Perhaps the Japanese premier will live up to his election promises and lance the sore that has festered in the Japanese financial system for more than 10 years – and do so without causing a crisis that is likely to affect the whole world. Perhaps Greenspan will gradually close down the money spigots to a more respectable trickle and cease trying to fan the flames of the economy in an attempt to give rise to a new wealth effect that would have consumers out spending as before. And sooner or later results in the rising inflation that the Austrian school predicts.

And many more "perhapses", even ranging beyond the list of major and lesser dominoes that was discussed above. So many of them, and all of them needed in one way or another to avoid the toppling of the first domino.

Thinking on these, and the possibility that the ring of dominoes will remain standing, one is tempted to add, "Perhaps pigs will grow wings and learn to fly, and all will be well in the best of all possible worlds.".

Or might one hope and wish that, "Perhaps dominoes will learn to fall sideways, instead of forward.", so that one crisis will not spill over and precipitate another. And another.

And another.

[PS. During the final editing it struck me that the structure of this essay is familiar. It then dawned that the style is reminiscent of the way Adam Hamilton (Zelotes) attracts one's attention with a story of interest before coming to the meat of the matter. While not thus intended, yet because imitation is the sincerest form of flattery, this essay is dedicated to Adam and his fine work.]

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