Game Plan

by Kevin D. Freeman

  It was a low-level attack, but it was a sign of what is to come. Technology around the world is simply very vulnerable. In April 2013 the German government raised the possibility of a flash crash in Europe. Less than one week later, it occurred. Der Spiegel reported, “within minutes, the Dax rushed around 180 points down—and also in the afternoon deep in the red. The European Stock Index also lost a flash in value.”38

  Meanwhile, our enemies are not sitting on the sidelines. Al Qaeda now has a Twitter account. Somalia’s al Qaeda affiliate, al-Shabab, is pushing its message 140 characters at a time: “Our war against the West is a war for the sovereignty and dominance of Allah’s Law above all creation. No to democracy and #Kafir laws!” it tweeted in February.39

  Our more powerful enemies are doing more than tweeting. The Chinese have launched a series of hard-hitting cyberattacks on America’s security and financial infrastructure. In February 2013, Americans were shocked—shocked!—to learn that the Chinese government had been hacking corporations to steal trade secrets, learn negotiating strategies, and otherwise engage in activity that can only be called economic warfare.

  Cybertheft has long been a part of China’s global security strategy. In 1995, Major General Wang Pufeng, a former director of the Strategy Department at the Academy of Military Science in Beijing, wrote, “The large-scale importation of information technology deep into the field of warfare will inevitably bring about a military revolution. This revolution has actually already started. . . . The issue of how to adapt to and achieve victory in the information warfare which we will face from now on is an important question which we need to study carefully.” A few years later, the Chinese were already thinking offensively rather than defensively. The authors of the widely noticed work of modern strategy Unrestricted Warfare, Colonels Qiao Liang and Wang Xiangsui, wrote, “a single man-made stock market crash, a single computer virus invasion, or a single rumor or scandal that results in a fluctuation in the enemy country’s exchange rates or exposes the leaders of an enemy country on the Internet, all can be included in the ranks of new-concept weapons.” They added menacingly, “Some morning people will awake to discover with surprise that quite a few gentle and kind things have begun to have offensive and lethal characteristics.”40

  It took several major Chinese hack attacks to awaken the U.S. government, however. On March 11, 2013, then national security advisor Tom Donilon warned China that the United States could not tolerate hack attacks. Businesses, he said, are worried about “sophisticated, targeted theft of confidential business information, and proprietary technologies through cyber intrusions emanating from China on an unprecedented scale.” He warned, “As the president said in the State of the Union, we will take action to protect our economy against cyber-threats.”

  But what took so long? For two years the Obama administration flatly rejected any strong measures to curb Chinese cyberattacks. Several options were dismissed out of hand, including economic sanctions and counter-cyberattacks.41

  While China has aggressively probed our vulnerabilities, it is not the only threat. There are rumors that al Qaeda will work with anyone to hack America’s electronic economy. According to a spring 2013 report from Bill Gertz, a journalist and national security expert, “An al-Qaida website recently posted a notice calling for major attacks on vital U.S. infrastructure. Basically [they are] calling on jihadists hackers to join together in this attack. They called it ‘Operation Black Summer.’ So, presumably, it’s going to unfold in the coming weeks.”42

  In the aftermath of the Benghazi terrorist attack of September 11, 2012, Islamic hackers openly threatened to target financial institutions. In October, Izz ad-Din al-Qassam Cyber Fighters posted, “We have selected the banks because we should have done something proportional to what has happened against us. In the system where . . . religion and sacred things are not honorable, and only material, money and finance have value, this seems a suitable and effective . . . act[ion] and can influence governors and decision makers.” When asked why they would target specifically financial institutions, the group replied, “Money is everything for you.”43

  Iran, too, has been attempting to hack U.S. financial institutions. The New York Times reported in January 2013 that Iran has been hacking American banks: “The attackers hit one American bank after the next. As in so many previous attacks, dozens of online banking sites slowed, hiccupped or ground to a halt before recovering several minutes later. . . . Security researchers say that instead of exploiting individual computers, the attackers engineered networks of computers in data centers, transforming the online equivalent of a few yapping Chihuahuas into a pack of fire-breathing Godzillas.”44

  Russian officials have observed our vulnerability to economic warfare. “[I]t is impossible to undermine such a big country like the U.S. through trade,” said the Russian intelligence expert and former KGB officer Konstantin Georgiyevich Preobrazhenskiy. “But it is possible through espionage, sabotage and other types of covert operations. Both Russia and China know the weaknesses of America and they use it as best they can.”45

  And yet nothing has been done.

  And while we wait, the enemy acts.

  London has become ground zero for economic warfare. Great Britain is not as financially powerful as the United States, and its Muslim population is more militant and more influenced by Middle Eastern potentates. That makes British markets even more vulnerable than America’s. London has played a major role in nearly every aspect of the financial terrorism we have identified. During the 2008 financial collapse, the lion’s share of shorting was coming from overseas sources such as London and Dubai. In 2013, emails were leaked from a major investment group based in London, Standard Chartered. One of them disclosed that a U.S. regulator had been told by a New York branch officer, “You f---ing Americans. Who are you to tell us, the rest of the world, that we’re not going to deal with Iranians?” Standard Chartered has also been accused of hiding some $250 billion in sixty thousand transactions with Iran that could have been used to fund nuclear development or even terrorist activities.

  The Chinese, too, are making massive inroads in London. In February 2013 the Telegraph reported that the Bank of England was closing in on a deal to make a currency swap with China, with the yuan emerging as a reserve currency. Some U.S. officials are actually encouraging this arrangement in the hope that it will strengthen the yuan against the dollar and improve our exports. But this approach assumes that the dollar will always be a highly sought-after reserve currency. This strategy represents a failure to appreciate that we could “win” a currency war of devaluation only to discover that we had destroyed the dollar in the process.46

  Monetary issues, it appears, are trumping all other considerations.

  Oil is once again a weapon against us. Iraq, abandoned by the United States, has largely become an Iranian proxy state. In November 2012 a high-ranking Iraqi urged other Muslim countries to “use the weapon of oil” against the United States in retaliation for our support for Israel. “The economic weapon is the strongest one to be put into effect now, to assure of standing by the Palestinian people, in light of there being no military power that can stand in the face of Israel at the present time,” the diplomat stated.47 Just as Russia aspires to become the world’s top oil producer, the United States is inflicting on itself ever more restrictive environmental regulations.

  The ultimate economic weapon—one that makes all the others seem like child’s play—is an electromagnetic pulse (EMP) attack designed to take America back to a pre-industrial age in a matter of seconds. This isn’t science fiction. It’s real, and a number of nations have been developing capabilities to carry out such an attack. And we have admitted to having no real ability to combat such a weapon.48

  So what is the United States doing about these threats? Plunging its head deeper into the sand. In 2010, Bill Gertz reported, “The Pentagon’s intelligence directorate is killing off one of its most strategically important mission areas: m
onitoring efforts by foreign governments to buy U.S. firms and technology. . . . The officials said that the move will kill one of the Pentagon’s most important and successful financial-threat monitoring programs, designed to track illicit and legal acquisition efforts by China and other foreign nations.”49

  While we are reducing our efforts to monitor and combat foreign influence, potential enemies such as China have actually stepped up efforts of political warfare. Bill Gertz reports:

  The activities of the People’s Liberation Army (PLA) General Political Department (GPD) include funding pro-China activities abroad, recruiting intelligence sources, spreading propaganda, engaging in media activities, funding front groups that promote Chinese strategy and goals and supporting perceived “friends” of China.

  The report is the first public study of Chinese military political warfare and was produced by the Project 2049 Institute, an Arlington, Va., think tank focused on bringing democracy to China and other Asian countries by 2049. . . .

  Among the targets are “international elites” who are used to undermine the integrity of groups and people Beijing views as anti-China.

  “At the strategic level, a core PLA political warfare mission is countering perceived political challenges that liberal democratic systems, universal values, and Western culture pose to the [Chinese Communist party’s] legitimacy within China itself and the broader international community.”50

  This means that the Chinese PLA has been funding American groups such as think tanks to deny that China is any sort of threat to America, even as the PLA has been actively pushing warlike preparations at home.

  It is no wonder, then, that in April 2012, President Obama did virtually nothing to help the Chinese dissident Chen Guangcheng when he escaped from house arrest and fled to the U.S. embassy. China holds hundreds of billions of dollars of U.S. debt, and we aren’t doing anything to stop them from buying our institutions. We are in a compromised position. They know it, and we are unprepared to deal with it.

  If America is to face down financial ruin, however, it will start with the dollar. It is to the dollar that we turn next.

  CHAPTER TWO

  This Time Is Different

  Back in summer of 2007, Jim Cramer of Mad Money on CNBC went on a rant about the lack of knowledge at the Federal Reserve:

  I have talked to the heads of almost every one of these firms in the last seventy-two hours and he has no idea what it’s like out there. None! And Bill Poole [then the president of the Federal Reserve Bank of St. Louis], he has no idea what it’s like out there. My people have been in this game for twenty-five years, and they’re losing their jobs and these firms are gonna go out of business and it’s nuts. They’re nuts! They know nothing! This is a different kinda market. And the Fed is asleep. Bill Poole is a shame, he’s shameful! He oughta go and read the Accredited Home document, at least I read the darn thing.

  Cramer was mocked. But he was right, as the release of Fed transcripts later proved.1 In 2008 he was mocked again when he claimed that a spate of short selling targeting the financial markets could be the work of financial terrorists.2

  He’s still right. They still know nothing. Only this time it could be much worse.

  Central bankers, including the Fed, seem convinced of their course once again while ignoring what should be obvious warning signs. The Fed is leading a global charge among central bankers to devalue their currencies. As Randall W. Forsyth of Barron’s writes, “Everybody’s racing to the bottom these days, including the central bankers.” He quotes Joan McCullough, a financial researcher, who says of both Japan and the United States, “‘They did it. And it didn’t work. Then we did it. And it didn’t work. Now they’re gonna do it again because they’re sure that it works. . . . It is at the same time shocking and disheartening that these goobers have not yet figured out that printing money does little beyond goosing stock and commodities prices.’”3

  Many observers, including our enemies, predicted that Western central banks would respond by devaluing their currencies. It was clear that bin Laden and others intended to “bleed us to death” not by their terrorist attacks but by what they knew would be our response.4 It is the predicted response that creates the opportunity for the kill. In my 2009 Pentagon report, I warned,

  The concern is that the response to the recent collapse by itself will strain available economic resources for some time with large budget deficits and high inflation risks. The situation would be made significantly worse in the event of further economic attack. It is in this vein that a potential Phase Three must be considered.

  Based on the assumed nature of Phase One and Phase Two, a Phase Three attack would likely involve dumping of U.S. Treasuries and a trashing of the dollar, removing it from reserve currency status. This is clearly foreseeable as a risk. . . .5

  When I wrote that report, our officials were convinced of the dollar’s permanent strength and appeal. When Treasury Secretary Timothy Geithner spoke at Peking University in June 2009, he reassured the audience of students that China’s dollar investments were safe. They broke out laughing.6

  No one in the government is listening. Our officials can’t imagine that we are at risk, even as our enemies are strategizing our demise.

  Parties in Russia and China as well as in the Middle East and Latin America are planning to launch an all-out assault on the dollar’s reserve status in an effort to destroy our economy. In my work for the Pentagon, I described “Phase Three” of the offensive against the American economy—a devastating attack on our currency. It may sound far fetched, but the evidence is there, and it is well documented. We can be certain that such plots exist, whether or not they ultimately become successful. Yet the Federal Reserve and the Obama administration seem hell-bent on the very policies that make us most vulnerable.

  The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar. Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia, as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications, including the possibility of a downgrading of U.S. debt, forcing rapidly rising interest rates and an ultimate collapse of the American economy. In short, a bear raid against the U.S. financial system remains possible and may even be likely.

  The Inflation Threat

  In February 2013 the Dow Jones Industrial Average hit 14,000 for the first time since October 2007. While Wall Street celebrated, others noticed that the American economy had actually contracted in the fourth quarter of 2012. The economist Arthur Laffer expressed dismay at the “catastrophic” conditions, pointing out that the “whole output of the economy” was on the downslope. “It’s amazing, isn’t it?” he said. “We spent $5.8 trillion in the last couple of years, and this is what we get for it. Have you ever heard of a poor man spending himself into prosperity? It’s just dumb on the outset. . . . Government doesn’t create resources, it redistributes resources. And this government spending stuff is why we have the great recession.”7

  How then to explain the return of good times on Wall Street? It’s all fake. It takes a lot of monetary printing that hasn’t yet affected the real economy but has gone into Wall Street’s financial markets, first in bonds and now into stocks. Dylan Grice of Societe Generale’s Global Strategy Team sums up the issue well: “When you devalue money, you devalue trust. . . . If we print a trillion dollars, we can now spend a trillion dollars. We have absolutely benefitted from this. We have a trillion dollars that otherwise we wouldn’t have had. But the question is: Who pays for that trillion dollars?” Monetary inflation leads to social breakdown. It is the ultimate economic warfare weapon. Looking at stock prices in isolation might cause you to believe a recovery is under way. Looking at the bigger picture, however, brings you to the conclusion that the currency collapse leading to the end of America may well be at hand.8

  While the governmen
t continues to maintain that it is not inflating the currency—after all, prices have not yet skyrocketed—the truth is that the currency bubble is enormous at this point. Jeff Clark of Casey Research points out that there are two kinds of inflation: price inflation and inflation in the quantity of cash. Clark, citing the researchers Carmen Reinhart and Kenneth Rogoff, points out that debt levels amounting to more than 90 percent of GDP are highly correlated with inflation. Historically, when U.S. debt levels have gone above that benchmark, inflation has risen to around 6 percent. But there is a delayed effect—inflation and debt do not happen at exactly the same time. Low inflation can quickly escalate. From 1915 to 1917, the inflation rate jumped from 1 percent to 17 percent. From 1945 to 1947, inflation jumped from 2 percent to 14 percent, and from 1972 to 1974, it skyrocketed from 3.2 percent to 11 percent.9

  Keep in mind that even though inflation hasn’t spiked yet, we can’t assume that it won’t. As Michael Snyder observes, Weimar Germany had its own brand of “quantitative easing” to pump its economy:

  The Federal Reserve is recklessly printing money out of thin air, and in the short-term some positive things have come out of it. But quantitative easing worked for the Weimar Republic for a little while too. At first, more money caused economic activity to increase and unemployment was low. But all of that money printing destroyed faith in German currency and in the German financial system and ultimately Germany experienced an economic meltdown that the world is still talking about today. This is the path that the Federal Reserve is taking America down, but most Americans have absolutely no idea what is happening.

  It is really easy to start printing money, but it is incredibly hard to stop. Like any addict, the Fed is promising that they can quit at any time, but this month [September 2013] they refused to even start tapering their money printing a little bit. The behavior of the Fed is so shameful that even CNBC is comparing it to a drug addict at this point. . . .10