Professor Steven Keen, who this week predicted a crisis in European and English banks following my article on November 24, said from Helinski this morning: “This is it with financial fragility. With a system so debt-overburdened, chain reactions can start from anywhere.”

He compared the situation with comments made to him by Ed Lazear, who was chairman of Bush’s Council of Economic Advisers from 2004-07 right in the middle of the crisis.

Lazear told Keen everyone was trying to stop each suspect bank from falling over to avoid “a Domino Effect”.

But Lazear said he felt it was more like a “Popcorn Effect”. If you stop one domino from falling, then you stop the lot. But if you take out one corn that has already popped, there are many more that can still pop, and you won’t know which one is next till it’s gone.

The issue now concerns government bailouts having ignited new asset bubbles, and the future of sovereign debt plus banks exposure to derivatives. I has referred to the US banks but Keen suggested I should be more concerned about Europe as national central banks like the US “have a limitless capacity to issue and finance their own debt in their own currency”. Last night Keen was proved dead right. Only closure of the US markets for Thanksgiving stop the bleeding of the European markets. What happens today is anyone guess but we appear to be facing another financial crisis.

Keen argued the “Yanks can continue debt-financing their way into the same Zombie Capitalism that the Japanese have been mired in for two decades — pump-priming the economy with public-debt-financed spending while the private sector simultaneously lets the air out of the economy’s tyres by a slow deleveraging. The US dollar will likely slowly descend as the charade continues.”

He is right but, as John Embry, chief strategist at Sprott Management points out, the US achieves this by cheating and their activities are probably illegal. The Europeans can’t cheat as they are not blessed, or cursed, with a national central bank and thus it is Europe where sovereign governments are more likely to default on bonds.

Nevertheless it looks as though Dubai might beat them all to the punch, but it will be a close-run thing.

Overnight Bloomberg reports Dubai World, with $US59 billion ($A65 billion) of liabilities, is seeking to delay debt payments, sending contracts to protect the emirate against default, surging by the most since they began trading in January.

Then news hit London and now we see what even a suspicion of default can create — or destroy.

The Times reports almost £44 billion ($A80 billion) was wiped off London’s biggest companies today amid growing fears the UK financial sector could be heavily exposed to Dubai World, the state-owned conglomerate that yesterday asked for a standstill on its debt pile.

The FTSE 100 tumbled 170.68 points or more than 3% to 5194.1 in its biggest one-day percentage fall since the market plunged to six-year lows in March.

“Investors had been hoping the British financial sector had worked through much its toxic debt, which included exposure to America’s sub-prime mortgage market,” The Times said, adding Credit Suisse estimates that European banks are exposed to about half of Dubai’s $US80 billion borrowings, naming Barclays and Royal Bank of Scotland as the UK lenders most at risk from the emirate’s worsening debt problems.

Some of the figures are very ugly and only the fact that the US markets are closed for Thanksgiving prevented further mayhem.

RBS, which is 70% owned by the UK taxpayer, fell 7.8%, wiping £1.73 billion off its market value. Barclays lost 8%, cutting its capitalisation by £2.65 billion, Standard Chartered dropped 5.8%, losing £1.9 billion. HSBC fell 4.8%, losing £6.2 billion of its value, and Lloyds Banking Group lost 5.6%, wiping off £1.5 billion.

In London, the FTSE 100 began its decline this morning before trading on the London Stock Exchange was halted for 3 1/2 hours due to what The Times described as a “technical hitch.”

When trading resumed at 2pm the leading index of blue-chip shares lost 136.99 points to 5,227.10. The London Stock Exchange also saw its stock fall, losing 5.34% to 771p, on fears the state-owned Borse Dubai could sell its 22% stake in the FTSE 100 company.

In France, the CAC index and in Germany the DAX both nursed falls of more than 3%. America’s Dow Jones industrial average is closed today for Thanksgiving.

One London trader said: “Dubai is weighing heavily on the market. It has its fingers in so many pies that it could have a contagion effect and there are concerns another country could have problems on the back of this.”

He added that today’s activity was very similar to when Lehman Brothers collapsed, warning that Dubai’s problems could be the catalyst for the market to fall further.

There have been reports that British companies were owed £200 million by Dubai’s government-owned companies, but some analysts put the total figure much higher.

“The bigger construction companies have to take it, because if Dubai bounces back they want to pick up more work. Smaller companies have to take any money they can,” one local analyst said.

Bloomberg reported earlier “Dubai is proposing to delay debt payments as it negotiates to extend maturities.”.

“According to the state-controlled company will ask creditors for a ‘standstill’ agreement as it negotiates to extend maturities, including $US3.52 billion of Islamic bonds due December 14 from its property unit Nakheel PJSC, Dubai’s Department of Finance said in an emailed statement. Moody’s Investors Service and Standard & Poor’s cut the ratings on several state companies, saying they may consider the plan a default.”

Rachel Ziemba, a senior analyst covering sovereign wealth funds at New York-based Roubini Global Economics commented: “They look desperate and the market is concerned that in the long term Dubai’s indebtedness is rising, not falling.”

Yves Smith, at Naked Capitalism points out Dubai is seeking a standstill on its debt while it renegotiates. “I’m not a credit default swaps expert,” she adds, “but that sounds like an event of default to me, and if so, that has the potential to have all sorts of repercussions. First, creditors who are not fully hedged who are subject to mark to market reporting will show significant losses. Second, the CDS protection sellers will also be showing losses and posting collateral.

“I got a message from someone who was on the conference call that suggested otherwise. Some European banks may be on the wrong side of this trade. As readers may know, EuroBanks went into the crisis with even lower capital levels than their US counterparts, and have taken fewer writedowns of their dodgy exposures.

“The standstill announcement … was a massive surprise. One could sense the panic in those asking questions … this could be the turning point in spreads and could be viewed similar to the Russian debt crisis in 1998 or the Bear situation in 2007 … based on companies and the accents of the people asking questions, it is obvious European institutions will be hit hard … Dubai made this announcement at the beginning of a four-day holiday, so there will be little news until next week … There is another wave of pain out there. This information does not seem to be making its way to other markets. It will.”

And it already is.

During the week the spotlight had turned to Europe but Embry has brilliantly exposed on the farce of US bond raising shenanigans.

Yesterday he slammed “the current equivalent of the mythical four horsemen of the apocalypse” referring to our financial leaders in the Western world who are enthusiastically promoting and aggressively implementing Quantitative Easing in an attempt to sustain a system and to bail out their banking cronies. He cites “the atavistic Lawrence Summers, the extremely naive Ben Bernanke, the truly feckless US Treasury Secretary Timothy Geithner and Bernanke’s British equivalent, the hapless Mervyn King, head of the Bank of England.

“There is absolutely no doubt in my mind that what these gentlemen are trying to engineer is going to end in utter debacle. Any serious attempt to withdraw the stimulus at this point will trigger a deflationary depression and a continuation of the current policies will put us firmly on the road to hyperinflation.”

But Embry goes far further claiming the US “ever more panic stricken as its financial condition deteriorates” so fears a failed auction (in spite, he says, of the Fed buying a significant amount of the bonds) that it feels the need to aggressively groom markets to create the impression that all is well in the debt world.

“Ergo, the US dollar is forcibly propped up and stocks, commodities and precious metals are taken down with the express purpose of getting a solid bid into the bond market on the eve of the auctions. As preposterous as this sounds, it is unfortunately a reality. The great news in this instance was that within a week of this travesty gold was away to the races again, posting new highs in the wake of a stunning Indian purchase of 203 tonnes of IMF gold.

Embry states this is still blatant manipulation and under any reasonable interpretation of the law concerning market interference or restraint of trade, it should be seen as highly illegal.

“Legitimate call option holders are essentially being defrauded by big banks as the gold price is intentionally driven down to ensure that the options expire out of the money.”

Embry wonders where the Commodities Futures Trading Commission (CFTC), which is responsible for monitoring these activities and compares their lack of action with the SEC failure to move against Bernie Madoff despite a decade of complaints.

The CTFC has promised an inquiry into manipulation of silver prices but a year has passed and nothing has been done. One imagines the power of the four horsemen is such that the CTFC will not implement the rule of law on any front until the scandal overwhelms them or, in the case of gold, “the physical demand overwhelms the chicanery in the paper gold market”.

This draws attention to the battle going on over physical demand for gold and suspicion that there is a lot of paper gold out their not backed by actual gold.

This is where it gets very interesting.

Of late we hear more and more stories governments and individuals demanding physical delivery of gold and not getting same.

“There are strong rumours that the Germans have requested that the gold held for their account in the US be repatriated,” Embry writes. He adds that Hong Kong has announced that it’s going to have its own depository near the airport to hold Asian gold, thus removing it from the increasingly suspect London market.

And here is the rub.

“In both instances this reflects growing concerns that the gold being held on the behalf of others in both the US and England might not be all there.”

Gone. The gold being held for Germany in the US might be gone. Where?

It is Germany’s gold and is held at places such as  Fort Knox for safe keeping. Is it safe? We don’t know. That is one reason why US presidential candidate Congressman Ron Paul and more than 320 of his fellow law makers want a full and public audit of the Fed.

A recent study by Paul Mylchreest, of Thunder road, a consultancy in London, adds to concerns. In his report he examine the gold turnover on the London Bullion Market Association, by far the world’s largest gold-trading exchange and concluded that the staggering volume transacted raised serious questions about how many paper claims there were on each London Good Delivery bar.

Embry cites an “even more fascinating story making the rounds in the upper echelons of the gold business claims that at the end of September a number of well-heeled investors in London with a large position on the LBMA called for physical delivery. Their counterparties, who apparently included JP Morgan-Chase could not deliver and offered a huge premium for cash settlement. The investors refused and demanded physical which sent the bullion banks hat in hand to their central-bank confreres to get actual gold bars in order to make delivery.”

How long this farce can be kept up depends entirely on physical demand continuing. But there are many stories like this circulating on the internet over the problems in obtaining physical gold. Indeed the daddy of them all concerns reports of tungsten filled gold bars being in circulation.

It’s all about trust and as sovereign nations and huge institutions seek to buy or redeem their gold we will soon see whether all that seems to glitter is what it seems.

Fears that nations may default on their debt, suggestions that the activities of the US financial authorities can be likened to Bernie Madoff’s amazing caper will not enhance trust.