(FORTUNE Magazine) – In spite of Gillian Anderson, I'm not much of a fan of The X-Files, or of conspiracy theories in general. I've met some of the world's leaders, and they seem a lot like the rest of us: Most of the time they haven't got a clue. Besides, as an economics professor I am by nature inclined to the view that the truth isn't out there; it's in here--that usually you learn more by thinking really hard about the data than you do by sniffing around for inside information.

Yet conspiracies do happen. George Soros really did stage a run on the pound in 1992, and a cabal of hedge funds apparently did try a squeeze play on Hong Kong's currency and stock market in August. I've even heard that some guy in Seattle is trying to take over the... (That's funny. My keyboard froze when I tried to finish that sentence.) But no conspiracy could be big or smart enough to play with the whole global financial market. Or could it? On a recent visit to Australia I had a fairly spooky conversation with some government officials.

Australia, in case you didn't know, is the miracle economy of the world financial crisis. Although most of its exports go either to Japan or to the stricken tigers, Australia has weathered the storm. The key to this has been its policy of benign neglect toward the exchange rate: Instead of raising interest rates to defend the Aussie dollar--which would also have slowed the Aussie economy--the central bank allowed the currency to slide, from almost 80 U.S. cents in early 1997 to the low 60s by mid-1998. The result was that while export prices plunged in U.S. dollars, they held up in local currency, and strong domestic demand kept the economy humming.

Luckily, financial markets apparently decided that the decline in the Aussie dollar represented a buying opportunity rather than a taste of things to come, and the currency stabilized. But there have been some anxious moments. In late August, in particular, it began to look as if the Aussie dollar was indeed collapsing: Day after day it fell, reaching a low of 56 cents. If it had gone much lower, the Reserve Bank might have had to raise interest rates after all.

What was all that about? Well, the officials I talked to confirmed what I had guessed: A lot of the plunge had to do with hedge funds shorting the currency. But what I didn't know was that some people from the hedge funds actually told the Australians, in effect, that resistance was futile--that they were only a small piece of a coordinated play against Australia, New Zealand, South Africa, and Canada--not to mention Hong Kong, Japan, and China.

Was this just boasting? There is no question that last summer a number of hedge funds wagered that a lot of dominoes were about to fall--that the yen was going to plunge, dragging down the Hong Kong dollar and the Chinese renminbi with it, or vice versa, and that the currencies of commodity-exporting countries like Canada and Australia would get dragged down in the backwash. It is less certain whether the hedge funds were actually the dominant source of speculation against the dominoes. And whether they acted collusively is all but impossible to know: If they did, it could have been tacit, a matter of carefully phrased generalities uttered over a bottle or two of expensive wine.

Of course, if there was a conspiracy, it failed. In fact, if you wanted to invent a secret history of world financial markets over the past six months, it would go like this: During the summer a few big hedge players--let's call them the Relativity Fund and the Pussycat Fund--agreed to stage a run on Asia-plus. They acquired huge sums of cash by borrowing in yen, shorting Hong Kong stocks, getting Australian credit lines, etc.; then they began ostentatiously selling all of the target currencies, spreading rumors about imminent Chinese devaluation, and so on. Meanwhile, they put the borrowed money into high-yielding assets like U.S. corporate bonds and mortgage-backed securities, and also some riskier things like Russian GKOs. But it all went wrong: Hong Kong refused to play by the rules, Russia fell apart, and investors became more risk averse. Suddenly the funds found some of their credit lines pulled. And since they had become such gigantic players, that started a cascade of margin calls. For example, as Pussycat began to unwind its yen shorts, it drove up the value of the yen, causing losses that forced it to unwind even more. And correspondingly, the assets the funds had been buying--like non-investment-grade dollar bonds--plunged.

In short, the strange events of the past few months--including the bizarre run-up in the yen and the mysterious near collapse of U.S. financial markets--are, according to this story, the byproduct of a vast get-richer-quick scheme by a handful of shadowy financial operators. How seriously do I take this? The story does seem kind of out there--but it just might turn out to be the truth.

--Paul Krugman

PAUL KRUGMAN is a professor of economics at the Massachusetts Institute of Technology.