Monday 6 August 2018

When Central Banks Go To War

I had a chance to give Dragonstrike Revisited an outing a couple of weeks back. It was at a gaming conference where the players were experienced gamers, but who had little subject knowledge of financial markets and economic warfare. For me, it was an interesting experiment in moving a game from one context (great subject knowledge, little gaming experience) to another (little subject knowledge, a good deal of gaming experience). We used the same narrative as before, but had a greater focus on the economic wargaming aspects.

Most of the players managed to pick up the basic context after a couple of turns. I am fairly sure that the same group of players would play a better game the second time round simply because they had a greater familiarity with the game mechanisms and underlying concepts. By construct, there was very little central bank co-ordination and co-operation. The game was channelled along the lines of using the financial markets as an instrument of war, and conflict was inevitable.

The setting was an armed confrontation between China and Japan just off the Paracel Islands in the South China Sea. There have been several confrontations in the past off the coast of China, the latest being in 2013. What marked the difference in this game is the willingness of the US to provide military support to Japan in the incident. The game was set over just a few days (21st April 2020 to 15th May 2020) and represents the prelude to a US carrier strike group sailing from San Diego to the Paracel Islands. The diplomatic manoeuvring of this period was external to the game, whose focus was to be the movements in the financial markets during this period.

As umpire, I played all roles other than those played by the players. The play sequence was quite straightforward. Each turn, I would announce the events within that turn, and invite the players to respond to those events in relation to how they moved the markets. I appreciate that this was a steep learning curve for the players, who tended not to have a background in financial markets. To that extent, it was something of a learning experience. The players would then tell me what they intended to do, I would map out the consequences of this onto a master scoreboard, and we would move on to the next turn.

The scoreboard consisted of a series of financial indicators in five key areas – stock market indices, the foreign exchange markets, the bond markets, shipping rates, and commodity prices. The actions, or inactions, of the players would move the markets, up, down, and sideways, according to what they did. The aim was to move the markets to achieve the goals of their characters.

In the event, we only managed to play four turns before running out of time. This represented the period 21st April 2020 to 29th April 2020, a bit more than a week. In this time, stock markets worldwide fell, in the US more than Japan and China. This represented the activities of the People’s Bank of China in the US stock markets, who were very aggressive in shorting the market. I would have liked to explore that further. The Dollar fell appreciably against the Euro, as the Euro became a safe haven. I found that interesting. The bond markets were quite unstable, with the US and Japan both experiencing a downgrade. I think that reflected quite aggressive behaviour on the part of the China player, but it was to be expected. Shipping rates rose considerably. This was to be expected if the South China Sea were to become a conflict zone, but it also reflected the purchase of spare shipping capacity by Chinese and Japanese governmental agencies. Commodity prices rose as all nations started to stockpile key resources, and the price of oil rose significantly. This was to be expected. Looking at the results as a whole, there were no major surprises in store. In a sense, that’s satisfying because it argues for the validation of the game, if only a limited validation.

There were a number of features of the game that could do with further thought. Once again, the question of the ability of the Chinese monetary authorities to de-stabilise the US financial markets became a moot point. This is worth some further thought because it is almost a default first move for the China player. Opinion does differ on this, and it could do with more thought about the process by which this could happen. The stockpiling of strategic commodities and shipping capacity was also another feature worth further consideration. These are some of the issues we shall think about in the weeks to come.


Stephen Aguilar-Millan
© The European Futures Observatory 2018




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