By Eamon Javers Eamon Javers | POLITICO
April 9, 2009
The Pentagon sponsored a first-of-its-kind war game last month
focused not on bullets and bombs — but on how hostile
nations might seek to cripple the U.S. economy, a scenario
made all the more real by the global financial crisis.
The two-day event near Ft. Meade, Maryland, had all the earmarks
of a regular war game. Participants sat along a V-shaped set
of desks beneath an enormous wall of video monitors displaying
economic data, according to the accounts of three participants.
“It felt a little bit like Dr. Strangelove,” one
person who was at the previously undisclosed exercise told
POLITICO.
But instead of military brass plotting America’s defense,
it was hedge-fund managers, professors and executives from
at least one investment bank, UBS – all invited by the
Pentagon to play out global scenarios that could shift the
balance of power between the world’s leading economies.
Their efforts were carefully observed and recorded by uniformed
military officers and members of the U.S. intelligence community.
In the end, there was sobering news for the United States – the
savviest economic warrior proved to be China, a growing economic
power that strengthened its position the most over the course
of the war-game.
The United States remained the world’s largest economy
but significantly degraded its standing in a series of financial
skirmishes with Russia, participants said.
The war game demonstrated that in post-Sept. 11 world, the
Pentagon is thinking about a wide range of threats to America’s
position in the world, including some that could come far from
the battlefield.
And it’s hardly science fiction. China recently shook
the value of the dollar in global currency markets merely by
questioning whether the recession put China’s $1 trillion
in U.S. government bond holdings at risk – forcing President
Barack Obama to issue a hasty defense of the dollar.
“This was an example of the changing nature of conflict,” said
Paul Bracken, a professor and expert in private equity at the
Yale School of Management who attended the sessions. “The
purpose of the game is not really to predict the future, but
to discover the issues you need to be thinking about.”
Several participants said the event had been in the planning
stages well before the stock market crash of September, but
the real-world market calamity was on the minds of many in
the room. “It loomed large over what everybody was doing,” said
Bracken.
“Why would the military care about global capital flows
at all?” asked another person who was there. “Because
as the global financial crisis plays out, there could be real
world consequences, including failed states. We’ve already
seen riots in the United Kingdom and the Balkans.”
The Office of the Secretary of Defense hosted the two-day
event March 17 and 18 at the Warfare Analysis Laboratory in
Laurel, MD. That facility, run by the Johns Hopkins University
Applied Physics Laboratory, typically hosts military officials
planning intricate combat scenarios.
A spokesperson for the Applied Physics Laboratory confirmed
the event, and said it was the first purely economic war game
the facility has hosted. All three participants said they had
been told it was the first time the Pentagon hosted a purely
economic war game. A Pentagon spokesman would say only that
he was not aware of the exercise.
The event was unclassified but has not been made public before.
It is regarded as so sensitive that several people who participated
declined to discuss the details with POLITICO. Said Steven
Halliwell, managing director of a hedge fund called River Capital
Management, “I’m not prepared to talk about this.
I’m sorry, but I can’t talk to you.”
Officials at UBS also declined to comment.
Participants described the event as a series of simulated
global calamities, including the collapse of North Korea, Russian
manipulation of natural gas prices, and increasing tension
between China and Taiwan. “They wanted to see who makes
loans to help out, what does each team do to get the other
countries involved, and who decides to simply let the North
Koreans collapse,” said a participant.
There were five teams: The United States, Russia, China, East
Asia and “all others.” They were overseen by a “White
Cell” group that functioned as referees, who decided
the impact of the moves made by each team as they struggled
for economic dominance.
At the end of the two days, the Chinese team emerged as the
victors of the overall game – largely because the Russian
and American teams had made so many moves against each other
that they damaged their own standing to the benefit of the
Chinese.
Bracken says he left the event with two important insights – first,
that the United States needs an integrated approach to managing
financial and what the Pentagon calls “kinetic” – or
shooting – wars. For example he says, the U.S. Navy is
involved in blockading Iran, and the U.S. is also conducting
economic war against Iran in the form of sanctions. But he
argues there isn’t enough coordination between the two
efforts.
And second, Bracken says, the event left him questioning one
prevailing assumption about economic warfare, that the Chinese
would never dump dollars on the global market to attack the
US economy because it would harm their own holdings at the
same time. Bracken said the Chinese have a middle option between
dumping and holding US dollars – they could sell dollars
in increments, ratcheting up economic uncertainty in the United
States without wiping out their own savings. “There’s
a graduated spectrum of options here,” Bracken said.
For those who hadn’t been to a Pentagon event before,
the sheer technological capacity of the Warfare Analysis Laboratory
was impressive. “It was surprisingly realistic,” said
a participant.
Still, the event conjures images of the ultimate Hollywood
take on computer strategizing: the 1983 film “War Games” in
which a young computer hacker nearly triggers a nuclear apocalypse.
The film and the reality had one similarity: The characters
in the movie used a computer called WOPR, or War Operation
Plan Response. The computer system used by the real life war-gamers?
It was called WALRUS, or Warfare Analysis Laboratory Registration
and User Website.
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