There are countless variations of the “butterfly effect” of chaos theory, which posits that the smallest happening can lead to great consequences — the beating of a butterfly’s wings in China can set off a chain of events that eventually result in a hurricane half a world away.

My favorite, I think, is Cormac McCarthy’s in his book, “All the Pretty Horses”: “Somebody can wake up and sneeze somewhere in Arkansas or some damn place and before you’re done there’s wars and ruination and all hell.”

It wasn’t exactly butterfly wings, but the news that the Mideast entity, Dubai World, wouldn’t be able to make timely payments on some $60 billion in debt roiled financial markets worldwide. Arab Emirate banks were quick to pledge aid, but jittery stock markets showed just how shaky the international financial structure remains.

Although in the midst of oil-rich nations, Dubai has little oil of its own; it has prospered as the playground of wealthy sheiks and the world’s rich and famous. Extravagant resorts, indoor ski runs with man-made snow, lavish shopping malls, and other expensive projects based on oil and real estate speculation blossomed — everything built on leveraged debt.

Then came the global financial meltdown and falling oil prices, and Dubai World, the emirate’s investment arm, found itself on the short end of the stick in terms of cash flow. One of the world’s busiest construction sites ground to a halt, investment dried up, and its debt crisis ensued.

Dubai World, we remember, was the outfit that set off a political furor in the U.S. when it tried to buy nine major U.S. shipping ports — a deal strongly supported by President Bush, but shot down by Congress in the face of enormous public outrage about potential security issues.

“That the same company that wanted to buy U.S. ports three years ago is now bankrupt and sending shockwaves around the world … gives an indication of how debt-laden many entities are, and how this crisis is dragging them under,” says Dave Schweikhardt, former Mississippi State University economist, now professor at Michigan State University.

More worrisome, he says, is whether there are credit default swaps tied to Dubai World’s debt. “The world can handle the bankruptcy of Dubai World, but credit default swaps can multiply the losses.”

The financial giant AIG “didn’t have a single mortgage on its books,” Schweikhardt notes; it only sold credit default swaps on other institutions’ mortgages. But when all those mortgages went bad, AIG was up the financial creek and we taxpayers gave ’em an $85 billion bailout.

Since credit default swaps are widely traded, the potential Dubai World exposure could be many times the $59 billion of debt, Schweikhardt says.

How much? Nobody knows, because it’s — still — basically an unregulated, unregistered market.

“I think this will be a real stress test for the world economy,” says Schweikhardt.

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