Do Money Flows Uncover The Future?

There are times when an emergent future can be seen from within the patterns of monetary flows that occur in the present. The movement of funds signifies the direction in which patterns of value and influence occur. They can be used to chart the rise to prominence of individuals, companies, or nations; as they can equally be used to chart their decline. Identifying the points at which the money flows switch can be used to map the turning points in history.

For example, the UK, prior to 1914, had been very much a creditor nation. The flows of gold - in a monetary system backed by the Gold Standard - tended to move into the country during the 19th Century. This was the consequence of Britain industrialising ahead of the rest of Europe and North America to generate trade surpluses that were further underpinned by the British Empire. The trade surpluses provided the basis on which loans were later made to overseas companies and governments in the form of overseas investments. 

Although this system had weakened before the First World War - the industrial production of the rest of Europe and North America had closed the gap with Great Britain - it was the cost of the war that turned Britain into a debtor nation. War had inflated public spending to the point where the economy only stayed afloat through borrowing from abroad. The stock of UK public debt stood at 25% of GDP in 1914. It rose to 135% of GDP in 1919. This is the point from which we can establish the decline of Great Britain as a great power. It took 30 years for that decline to burn through - which we mark by Indian independence - but it was evident in 1919.

In 1919, the principal holder of UK national debt was the United States. This, in turn, is another telling point. Here we can chart the transition from one declining great power - the United Kingdom - and the rise of the succeeding great power - the United States. This transfer of indebtedness is something that has great resonance today.

The past forty years have been characterised by the rise of China as an industrial nation. The US is the largest customer for Chinese manufactured goods, which has given rise to large Chinese trade surpluses with the US for a good number of years. Rather than repatriate these earnings - which are denominated in the global reserve currency, the US Dollar - which would cause the Yuan to appreciate, the Dollar earnings of Chinese entities have been recycled into American financial instruments. Mainly into US Treasuries.

This growing source of US indebtedness to China has been a cause of concern for years and is the root cause of the bout of economic warfare in recent years. From the American perspective, the retention of Chinese funds offshore artificially supresses the Yuan against the US Dollar, giving China an 'unfair' trade advantage with the US. The growing hostility between the US and China calls into question the use of America by China as an investment destination for Chinese funds. 

The COVID pandemic has served to make matter worse. The fiscal response in the US - over $US2 trillion - has provided a cash injection that has served to generate a recovery in China that is faster than expected and an increase in Chinese trade surpluses with the US. The Yuan hasn't appreciated in this process and China hasn't stepped up its purchases of US Treasuries. The question remains of where the Chinese surpluses are being recycled. Data from the Bank for International Settlements indicates that, compared with 2016, Chinese commercial banks have increased lending to developing countries, increasing the footprint from under 20% of all lending in 2016 to over 25% in 2020. This is skewed towards lending in the Asia Pacific region, and Africa and the Middle East. 

We have now reached a really odd situation. The US taxpayer is funding the US consumer, who is buying manufactured goods made in China. This causes a Chinese trade surplus with America in US Dollar terms, which is recycled to developing nations along the BRI as Chinese financial assistance denominated in US Dollars. In turn, this financial assistance is subject to a flight of safety, where institutions in the developing world are looking for a safe harbour in US Treasuries, which goes to fund the US fiscal deficit. And so the circle is closed.

There are two points to note. First, the cycle is inherently unstable. The link between the US and China is not a stable one. Even with a change of President in the US, it is unlikely that the economic hostility between the two nations will diminish greatly. China is the rising power and the US is the declining one. There is bound to be a degree of friction in this process. Second, the ability of the US to act as a safe haven presupposes that investor confidence in the US Dollar remains high. The prospects are that it will not as the US struggles to deal with an ageing population later in this decade.

That all leaves us potentially at one of those inflection points in history. The key event is where the Chinese surpluses are switched from purchasing US Treasuries to commercial lending to entities in the developing world as part of a targeted foreign policy. This heralds a form of imperial expansion, with a distinctly Chinese footprint - tributary diplomacy. The key uncertainty as we peer ahead is whether or not the United States has an answer to this? If it does, then the system will continue for now. If it doesn't, then the retreat of American interests could be very fast indeed.

Stephen Aguilar-Millan

© The European Futures Observatory 2020

The Belarussian Right Hook - Lessons Learned

If we are to use a game framework as a learning experience, then it does no harm to consider what the lessons learned from the experience might be. This game was an experiment in producing a top level geopolitical game to feed a timeline into a mid-tier economic and financial game. How well did that go? 

We can examine this question on two levels. First, how did this game play as a game? What changes would we want to introduce of we were to play the game again? How could we refine the game even further? Second, how useful was the timeline the game produced? Does it capture a reasonable flow of events? Are there other factors that we might want to add to the game to derive a better timeline? Let's think about these questions.

The main premise of the game was to give Russia an advantage by starting from Belarus. I'm not sure that advantage was fully used in the game. Russian forces did start at Brest, but didn't enter the game until Turn 4 (D+12). I felt that was a bit late in the day. I think that it would have played better if the Russian forces had entered the game at the outset. Perhaps an amendment might be that Russian forces can start Turn 1 in Belarus, but have to vacate Belarus by the end of Turn 1? That would bring the advantage to the foreground.

I'm not sure that we got the Russian reinforcements right. We rolled a dice to see when reinforcements could arrive through Crimea, and it came out at Turn 3 (D+9). I feel that this was a bit late in the day. I think that in future games, we ought to allow Russian forces to come through Crimea at the start of Turn 2. Equally, we rolled a dice to determine when Russian reinforcements from the Central and Far Eastern Military Districts would arrive. This came out as Turn 6 (D+18). Once again, I felt that this was a bit late in the day. In future games, we ought to allow for these reinforcements to arrive sooner - possibly at some point in the first three turns.

The Blue Team military structure would always present a problem. There are three parts to the Blue Team - NATO, the EU Common Defence and Security structure outside of NATO, and the rest of the Blue Team (Ukraine and Moldova). Perhaps the way to deal with this issue is for three players to act for the Blue Team? Failing that, there will always have to be a degree of flexibility in representing the Blue Team. In this game, the EU Nordic Battlegroup was eager to get to grips with Russian forces. There is scope for another game where it is less so, and there is scope for yet another game where some elements are keen to be involved (the Baltic States) and others less so (Sweden and Finland). The operation of the Blue Team gives us great scope to mix and match varying operational conditions to generate a set of very different games.

The central object of the game was to generate a convincing timeline. Did we do that? In many respects we did, but the timeline needs to be adjusted to account for factors outside of the game. The big question surrounds the attitude of China towards events in Europe. Would conflict in Eastern Europe lead to Chinese adventurism against the US in the western Pacific? Or against Russia in the Siberian Far East? 

These are great questions that the game doesn't answer. I am not at all certain that it should. We had to assert a degree of containment within the game. We did not allow Russia or the US to advance to the nuclear threshold, although the actions of the Nordic Battlegroup made that more likely. A small tactical nuke on arriving Swedish and Finnish forces through Riga would have slowed the advance into north western Russia considerably. However, it would have led to a very different game to the one we wanted to play, so neither side was allowed to escalate to the nuclear threshold. That was an umpire assertion which could be changed in future games, especially if the Russian forces in Kaliningrad were to play a greater role.

In producing the timeline, we have added a set of reactions from China and Japan, who would feature in an economic and financial game, but not in the geopolitical game. This is an act of converting the result of the geopolitical game into a format that could be used for the economic and financial game. Whilst there is scope to improve the geopolitical game, it has yielded a timeline that we can put to good use in an economic and financial game. In that respect, it has served the purpose for which it was played.

Stephen Aguilar-Millan

© The European Futures Observatory 2020

The Belarussian Right Hook - The Timeline

The object of this game was to derive a timeline that could be used as an input into an economic and financial wargame at a later stage. This begs the question of what that timeline would look like and how we would order the output for that purpose. Key to our thinking is simultaneity - if that is happening here, then what is happening there? The geopolitical game provides us with a narrative from which we can develop the timeline.

The first issue we have to address is whose timeline? This touches upon a core issue of who the actors should be in the economic and financial game. This expands the focus of the game from being concerned about regional events in Eastern Europe to being concerned about global reactions to these events. That is quite a switch. 

The geopolitical game laid down an event, and we now have to consider how that event would be viewed by the actors in the economic and financial game. A first run at who the actors would be are: the US Federal Reserve, the ECB, the Bank of Japan, the Bank of England, the People's Bank of China. This would imply a five player game. This could be adjusted at a later date to include other financial actors representing other financial centres. 

This thinking lends itself readily to a cross impact matrix style of thinking. This is our first attempt at weaving this into a timeline:

Timeline: D+3

Geopolitical headline: Russia advances across southern Ukraine and besieges Kiev. Romania maintains the independence of Moldova.

Response in: 

Washington: Concern at events, diplomatic efforts to contain the situation. 

Brussels: Concern at events, diplomatic efforts to contain the situation. 

Tokyo: Concern at events. 

London: Concern at events, diplomatic efforts to contain the situation. 

Beijing: Concern at events

Timeline: D+6

Geopolitical headline: Kiev falls, Russia consolidates it's hold on southern Ukraine, Romania invades Ukraine.

Response in: 

Washington: Diplomatic efforts to restrain Romania. 

Brussels: Diplomatic efforts to restrain Romania. 

Tokyo: Concern at escalation of events. 

London: Diplomatic efforts to restrain Romania.  

Beijing: Concern at escalation of events.

Timeline: D+9

Geopolitical headline: The Ukrainian army is largely destroyed and the Romanian Army is defeated and retreats back towards Moldova.

Response in: 

Washington: Warns Russia that Romania is a member of the NATO alliance, has been defeated, and ought to be allowed to withdraw to Moldova. 

Brussels: Under the Common Security and Defence Policy, the Visegrad Battlegroup and the Nordic Battlegroup are alerted to activation.  

Tokyo: Concerned by events, places armed forces on alert. 

London: Follows US lead within the NATO framework.

Beijing: Concerned by events, places armed forces on alert.

Timeline: D+12

Geopolitical headline: Romanian Army destroyed in Ukraine, Poland invades Ukraine and advances towards Kiev, the Lithuanian Army invades northern Russia.

Response in: 

Washington: Facilitates escalation in Eastern Europe, considers the actions of Lithuania and Poland as occurring within the NATO framework as a response to actions against the Romanian Army.

Brussels: Under the Common Security and Defence Policy, the Visegrad and Nordic Battlegroups are committed to action. Hungary dissents, Germany remains undecided. 

Tokyo: Concerned by events, armed forces remain on alert. 

London: Places armed forces on alert, waits for lead from Washington. 

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+15

Geopolitical headline: Article 5 triggered and NATO airpower committed to action in Ukraine. Polish forces capture Kiev and the Nordic Battlegroup drives further into Russia.

Response in: 

Washington: Congress approves Presidential action, US forces to be committed as they become available. 

Brussels: Proposal to commit EU to NATO actions. 

Tokyo: Concerned by events, armed forces remain on alert. 

London: Commits RAF and Royal Navy to the conflict, along with land based forces when they are available. 

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+18

Geopolitical headline: Germany supports Poland, Sweden and Finland arrive in the Baltic States. The Nordic Battlegroup drives on to the Dnieper.

Response in: 

Washington: Diplomatic and material assistance to NATO allies, USAF committed to action. 

Brussels: Wrangling over the degree of commitment to provide to NATO. Hungary, Greece and Cyprus objecting to the EU becoming involved.

Tokyo: Concerned by events, armed forces remain on alert. 

London: Commits to supporting NATO action. 

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+21

Geopolitical headline: Russia destroys the Lithuanian Army and advances to repel the invaders. Russia advances in Ukraine to besiege Kiev again.

Response in: 

Washington: Diplomatic and material assistance to NATO allies, USAF committed to action. 

Brussels: Wrangling over the degree of commitment to provide to NATO. Hungary, Greece and Cyprus objecting to the EU becoming involved. 

Tokyo: Concerned by events, armed forces remain on alert. 

London:  Commits to supporting NATO action. 

Beijing: Concerned by events, armed forces remain on alert.

Timeline: D+24

Geopolitical headline: NATO forces in Ukraine push back Russian forces across southern Ukraine. Nordic Battlegroup pushed back in north west Russia.

Response in: 

Washington: Diplomatic and material assistance to NATO allies, USAF committed to action. 

Brussels: Wrangling over the degree of commitment to provide to NATO. Hungary, Greece and Cyprus objecting to the EU becoming involved. 

Tokyo: Concerned by events, armed forces remain on alert. 

London: Commits to supporting NATO action. 

Beijing: Concerned by events, all armed forces remain on alert. Forces stationed across the Taiwan Strait and by the South China Sea placed on very high alert.

Timeline: D+27

Geopolitical headline: Russian forces largely expelled from Ukraine. The Nordic Battlegroup make gains in north west Russia.

Response in: 

Washington: Diplomatic and material assistance to NATO allies, USAF committed to action. 

Brussels: Watered down and ineffective commitment to support NATO. 

Tokyo: Concerned by events, armed forces placed on high alert. 

London: Commits to supporting NATO action. 

Beijing: Concerned by events, all armed forces remain on alert. Forces stationed across the Taiwan Strait and by the South China Sea readied for action.

This framework gives us about four weeks of events to map into the economic and financial game. All of the central bank actors will be expected to support the geopolitical and diplomatic efforts of their governments. At the end of the sequence, we wanted to hint at the possibility of China becoming more aggressive in south east Asia as the US becomes distracted by events in Eastern Europe. This isn't the only possibility. We could have placed the possibility of Chinese support to the US in return for China annexing a slice of Far Eastern Russia. Either possibility would provide an interesting game focused on Chinese opportunism.

We now have a developed timeline resulting from the game that can be used as a sequence of inputs for a ten turn economic and financial game (we need to include D+0, the opening position) involving five players. However, before we turn to that, we would like just one more post on this game that looks at the lessons learned. This framework is something of an experiment for us in nested scenario building and it would pay us to reflect on the technique and the outcome.

Stephen Aguilar-Millan

© The European Futures Observatory 2020

The Belarussian Right Hook - The Game

This was our first attempt at producing a nested gaming framework. I'm not sure that we altogether succeeded, but it's interesting to look at where we feel uneasy. We wanted to keep the geopolitical element of the nesting relatively simple. We were looking for a straightforward geopolitical narrative that we could play over a deeper economic and financial game. The game Putin's War provides one such possibility. It offers the potential to create a geopolitical narrative based around Russian activity in Ukraine and the Baltic States in the near future.

One feature of this part of the world is that Belarus sits between Ukraine and the Baltic States. Belarus is often seen as a Russian proxy, which is normally a reasonable assumption, and one fear of NATO is that combined Russian and Belarussian wargames could provide a launch pad for Russian intervention in the region. There are two lovely possibilities here: (a) the wargames provide a launch pad into the Baltic States - the the Belarussian Left Hook, and (b) the wargames provide a launch pad into Ukraine - the the Belarussian Right Hook. It is this latter possibility that we wanted to examine in this game, leaving the former possibility for a subsequent game.

In setting up the game, elements of the Russian Western Military District would start in Belarus, with the intention of falling upon Ukraine from the north, between the River Bug and the Pripyat Marshes, starting in the region of Brest. The Belarussian forces would support the Russian forces if Belarus was invaded and would not undertake any activity outside of Belarus. Elements of the Russian Southern Military District were available for the Russian player, at the outset from the region of Rostov and Kursk, or through Crimea after a delay (determined by a dice roll). They would be joined by reinforcements from the Central and Far Eastern Military Districts after a delay (determined by a further dice roll). The NATO and non-NATO blue team forces would operate under current operating policies. Each turn represents roughly three days in real time, with somewhere between two to three turns representing a week. 

At the outset of the game, the main force invading Ukraine originated from the Russian Western and Southern Military Districts. As NATO wasn't involved at that point, Russia had air superiority, which was used to assist an assault and capture of Kharkov. Ukraine responded to the invasion by attacking the Operational Group Transnistria (OGT), an army strength formation based in Transnistria. This formation was routed and forced to withdraw into Moldova, which not only brought Moldova into the conflict, but also Romania. The Romanian Army destroyed the OGT and then advanced to secure Odessa. By D+3, Russian forces had advanced far enough to lay siege to Kiev.

The Russian 49th Army went on to capture Kiev and President Putin held a rather hastily assembled victory parade. The Ukrainian and Romanian Armies fought back and made territorial gains in southern Ukraine. By D+6, Russia had started to garrison the cities captured in Ukraine, despite Ukrainian forces having crossed the Dnieper. Russia counter-attacked across the Dnieper, at which point reinforcements from the Southern Military District arrived through Crimea. By D+9, most of the Ukrainian Army had been destroyed and the Romanian Army had been pushed back towards Moldova. Russia had cleared the territory east of the Dnieper, cleared all Ukrainian cities other than Lvov, and enjoyed almost complete air superiority.

This proved to be the turning point in the game. Russia continued to enjoy air superiority and used that feature to destroy the Romanian Army. The destruction of the Romanian Army prompted a response from Poland. The Polish 2nd Army Corps invaded western Ukraine to meet the Russian challenge. By D+12, the Polish forces had advanced to almost reach Kiev. In the north, the Lithuanian Army, avoiding Belarussian territory, crossed into Russia south of the Dvina River. NATO was gradually being drawn into the conflict. The North Atlantic Council met and decided that although the Romanian actions had been outside of the scope of the North Atlantic Treaty, the destruction of the Romanian Army did constitute a breach of Article 5, justifying the actions of the Polish and Lithuanian Armies. This released the NATO air capacity.

The intervention of NATO air power allowed, by D+15, the Polish Army to capture Kiev, the Lithuanian Army to move southwards to capture Smolensk and then Bryansk, the Estonian Army to capture Rzhev, and the Latvian Army to secure the Russia-Belarus border. At this point, Belarus was cut off from Russia. The Russian reinforcements from the Central and Far Eastern Military Districts then entered the fray. Whilst seeking to consolidate their gains in southern Ukraine, the main focus of the Russian forces was to repel the invasion from the Baltic States. By D+18, the forces of the Baltic States had been pushed north of the Dnieper River, but at the cost of Russian losses in central Ukraine as the German Army reinforced the Polish forces in the area of Kiev and the 13th Ukrainian Army Corps occupied Odessa. Elsewhere, the Swedish and Finnish Armies, as part of the EU Nordic Battlegroup, landed in Riga and had started to deploy for action through Latvia.

The Russian push continued, aided by control of the air. In the east, the main focus was an advance across the Dnieper to recapture Smolensk. By D+21, this resulted in the Lithuanian Army being destroyed, but the Swedish and Finnish Armies advancing to contact along the line of the Dnieper. Whilst in the west, the focus was a push to recapture Kiev. The Russian 5th and 58th Armies laid siege to the Polish 2nd Army in Kiev. The Poles were aided by a reconstituted Romanian Army, the German Army, and the Czech Army Corps, which had just entered operations. This proved to be enough to mount an effective counter-attack. By D+24, the NATO forces had pushed the Russian forces back as far as Kharkov and threatened to invade western Russia from Ukraine. The Russian advance north across the Dnieper continued, resulting in the destruction of the Finnish Army, but at a heavy cost to the Russian forces. By D+27, the German Army had occupied Dnipropetrovsk, the Romanian Army had occupied Kharkov, and the Polish 2nd Army had occupied Bryansk. The Nordic Battlegroup was advancing towards Smolensk.

At this point we ended the game. We rather felt that it was something of a NATO win. Russia had failed to secure their objectives in Ukraine and the NATO allies had the opportunity to determine a peace that was worse than the opening position for Russia, possibly giving Crimea back to Ukraine. I think that we ought to have kept more detail of the moves, which is from where my disquiet about the game originates. However, I may be worrying unnecessarily. By photographing each move, I was able to retain a certain amount of detail that I have been able to recreate here.

If I were to play this game again, I would like the right hook to come in Turn 1, and for it to be heavier than a single unit. I would have the OGT stay in Transnistria and the additional forces come into play sooner. We need to work on the NATO political mechanism. It's far more complicated than we modelled and I don't feel that we adequately captured that complexity. However, looking back, it was a reasonable first stab at creating a timeline, so perhaps I'm being a bit too hard upon myself?

Stephen Aguilar-Millan

© The European Futures Observatory 2020