by Jim Rickards, Daily Reckoning:
In my 2011 book, Currency Wars, I gave a detailed description of the first-ever financial war game sponsored by the Department of Defense.
This financial war game took place in 2009 at the top-secret Applied Physics Laboratory located about twenty miles north of Washington, D.C. in the Maryland countryside.
Unlike typical war games, the “rules of engagement” for this financial exercise did not permit the use of any kinetic weapons such as bombs, missiles or drones.
The only weapons allowed were financial instrument including stocks, bonds, currencies, commodities and derivatives.
The contestants included about 40 players on the six teams and another 60 participants including uniformed military, civilian defense officials and observers from the Treasury, Federal Reserve, CIA and other government agencies as well as think tanks, universities and financial industry professionals.
In that original financial war game, a scenario involving Russia, China, gold and the destruction of the U.S. dollar was played out against a backdrop of geopolitical events including the collapse of North Korea and a threatened Chinese invasion of Taiwan.
On May 8, 2015, the Pentagon sponsored a new financial warfare session, which I was also invited to attend. This time the financial war took place inside a secure meeting facility at the Pentagon itself.
This new financial war game exercise was smaller and more focused than the one in 2009. I was one of three individuals from the investment management community. Our scenario this time was not global, but was limited to a confrontation between China and the U.S. in the South China Sea.
Our role was not to contemplate the use of aircraft carriers, submarines or missiles in such a confrontation. We were there to consider the use of financial weapons such as disruption of payments systems, cyber-attacks on banks and stock exchanges, and trade sanctions that could cut off supply chains and dry up energy imports.
One of the main topics of discussion was the use of sanctions involving access to the Society of Worldwide Interbank Financial Telecommunication, known as SWIFT.
Contrary to the assumptions of many, SWIFT is not a bank or a financial institution itself. It is more like a phone company or internet service provider that facilitates communication among its members.
SWIFT has over 10,500 banks and asset managers as members and handles over 5 billion messages each year amounting to trillions of dollars of payments from one member to another.
SWIFT message traffic is literally the oxygen supply that keeps the global financial system alive.
In 2012, the U.S. and its allies were successful in kicking Iranian banks out of the SWIFT system.
This was extremely damaging to the Iranian economy and led to hyperinflation, bank runs, instability and social unrest until President Obama eased these sanctions in late 2013.
The U.S. Senate has more recently called for the use of SWIFT-related sanctions against Russia. In response, Russia has said that it would regard an effort to ban access to SWIFT as an act of war.
In our new financial war game, we asked; what would happen if the roles were reversed?
What if financial weapons developed by the U.S. were adopted by China and turned against the U.S. and its allies?
These and other interesting scenarios made for a long and lively day of discussions among our team of experts convened for this exercise in twenty-first century warfare.
I learned two lessons that day.