Fought with currencies, embargoes and hackers, economic warfare may lack the “shock and awe” of conventional battles but it could still pose a threat to the U.S., especially in these troubling economic times.

Picture this hypothetical dreamed up by a national security expert obsessed with economic catastrophe:

Angry that U.S. policies aimed at boosting the economy have devalued their $2 trillion of currency reserves, the Chinese decide to stop buying Treasurys just as America tries to finance its massive spending plans.  

In response, the U.S. imposes trade sanctions against China, which in turn pushes for a global currency. From there, the U.S. accuses China of manipulating its own currency and things escalate further.

Without a shot being fired, those actions represent a type of unfriendly economic competition that some are very worried about.

‘Unstable Escalation’

“I think it’s very likely the participants wouldn’t call it a war. Each side would say they are acting in their best interest. But this could lead to an unstable escalation,” said James Rickards, co-head of threat finance and market intelligence at consulting firm Omnis.

The struggling U.S. economy and scary financial crisis could make such an escalation more likely and more damaging.

“On the one hand, you could say it [would have] less of an impact because we’re already in a more defensive posture due to the recession,” said Dan Goure, vice president of the Lexington Institute, a nonprofit public-policy research organization. “On the other hand, we’re closer to the edge so we have fewer resources.”

Rickards was more unequivocal, saying flatly, “It definitely raises the stakes which could play out in some financial warfare scenarios.”

To be sure, despite the worries from some experts, there is little to indicate an all-out economic war is in the offing, especially given shows of solidarity like at the recent G-20 meeting in London.

“They are all trying to go through this by working together and with coordinated fiscal stimulus. This is not something where there’s any talk of warfare, except potentially the Chinese situation,” said Ernest Preeg, a former American ambassador to Haiti and a former White House economic official.

A Dry Run for Economic Warfare

Still, the Pentagon is apparently concerned enough to hold its first ever war game focused on economic warfare, according to a person familiar with the event. 

“There was good news and bad news. The good news was the game worked successfully. The bad news is China won,” the person told FOX Business.

The Pentagon is planning similar war games in the future, the person said, underscoring worries about U.S. vulnerability during the current crisis.

“Even though this was a Bush Administration initiative, I think it resonated kind of well with the Obama Administration because they are a little bit more forward thinking” in terms of linking the economy with geopolitics, the person said.

The existence of the war game was first disclosed by Politico.

China: A Formidable Opponent

It’s not surprising China won the war game, as the country is thought to be the most worrisome potential opponent. In fact, Chinese officials wrote a book in 1999 called “Unrestricted Warfare,” focusing on non-traditional modes of conflict such as economic war.

“If we’re doing our first war game in 2009 and they wrote the book 10 years ago, we’re a decade behind,” said Goure.

Like many military engagements, an economic war might have murky beginnings.

“I don’t think a country will wake up and say, 'I am declaring economic war on the United States.' I think it will be tit for tat and misreading of intentions. It just escalates,” said Rickards. 

Such an economic engagement can take various forms, including everything from currency dumping and cyber attacks on critical infrastructure to oil blockades and economic sanctions.

The form that seems most likely, China dumping its holdings of U.S. Treasurys, is actually probably the most far-fetched.

“In peacetime, that idea has very little plausibility because it will do much more damage to them than us,” said Goure, citing the loss of value of their investments.

Instead, China, which held 24.07% of foreign-owned Treasury securities as of January, could decide to stop buying U.S. debt, though the intentions behind such a move could be debated.

“It’s hard to say if that’s economic warfare or just good business practice,” said Goure, half-joking.

An economic war between the U.S. and another adversary would hardly be the world’s first. Countries have resorted to such measures in the forms of trade embargoes, blockades and protectionism for centuries.

To take one recent example, the U.S. has considered economic sanctions to punish Iran for its nuclear programs. In response, Iran has said it could hold the world’s oil supply hostage by blocking the Persian Gulf’s export routes, a move that would likely damage the global economy.

“In a globalized world, the ability of one country to impact the economy of another, and hence affect it strategically, has grown exponentially from what it was before,” said Goure.