Similarly, any economic collapse that destroyed the water infrastructure would be catastrophic, according to the EMP Commission:
Denial of water can cause death in 3 to 4 days, depending on the climate and level of activity. Stores typically stock enough consumable liquids to supply the normal demands of the local population for 1 to 3 days, although the demand for water and other consumable liquids would greatly increase if tap water were no longer available. Local water supplies would quickly disappear. Resupplying local stores with water would be difficult in the aftermath of an EMP attack that disrupts transportation systems, a likely condition if all critical infrastructures were disrupted.
People are likely to resort to drinking from lakes, streams, ponds, and other sources of surface water. Most surface water, especially in urban areas, is contaminated with wastes and pathogens and could cause serious illness if consumed. If water treatment and sewage plants cease operating, the concentration of wastes in surface water will certainly increase dramatically and make the risks of consuming surface water more hazardous.47
Now, we do not see total collapse as a likely outcome, although it should be noted as a risk with extreme consequences. To address this one, you will have to take some disaster-preparedness measures, as we will outline in chapter eleven, “A Sane Strategy for an Insane World.”
We face a number of serious vulnerabilities and risks. The threats may be more or less remote, but they exist because of our own economic policies. The potential damage is huge. In the next chapter, we’ll look at how some attacks might take place and how you can respond if they do.
CHAPTER FOUR
What to Do When Crisis Strikes
It should be clear by now that, when it comes to the economy, things are not as they seem and certainly not what we would call “normal.” Our enemies have targeted our very way of life, and our government’s response adds to the uncertainty. The next crisis might be Chinese computer hacking, an undermining of our infrastructure, Wall Street panic, dumping of bonds, a currency collapse, or a rapid loss of confidence—but each form of attack will have unique consequences, and we have to be flexible enough to respond appropriately. Understanding the law of unintended consequences, or at least unexpected consequences, could make the difference between survival and ruin. Yet while it is obvious that our economic situation is not normal, the vast majority of investment plans are predicated on traditional thinking.
The possibility of economic terrorism is quite real. Whether our geopolitical enemies sell off U.S. bonds or simply decide to remove the dollar as the reserve currency, whether they inflate their own currencies in a currency war or engage in a short-selling orgy as they may have during the 2008 stock market collapse, Americans’ financial futures are in serious peril. There are many threats, and each requires a different response. The economy is far too fluid and the means of attack too diverse to offer a simple solution. You may hear some encourage you to put all your dollars in gold; others may recommend stock; still others may push bonds or real estate. But there is no “one size fits all” solution.
The biblical monition “Sufficient unto the day is the evil thereof” is truer than ever in our modern world. In this chapter, let’s walk through a variety of possible troubles and discuss their causes and effects. In the chapters that follow, we will explain how to respond to the threats and protect your investments.
Electromagnetic Pulse
One of the most frightening possibilities of economic warfare is an electromagnetic pulse (EMP) attack, which is within the means of many of our enemies and could completely wipe out the American economy. The science of such an attack is fairly basic, and a number of potential perpetrators have discussed it. What’s worse, we currently have no defense against it.
First, some basics. Our society is dependent on electricity, which is delivered through complex interconnected technology systems. If these fail catastrophically, modern life comes to a halt. If the failure is widespread, it would probably take years to restore the systems. Without power, there is no way to distribute water, food, medicine, or other necessities. The EMP Commission described a doomsday scenario of widespread disease and starvation with an estimated 90-percent loss of life.
What could cause such a catastrophic failure? A relatively low-yield nuclear device detonated above the atmosphere of the continental United States would send a pulse wave across the nation that would overwhelm power generation and render nearly all electronic devices useless. We know this happens based on our own nuclear testing.
We also know that solar activity could generate a catastrophic electromagnetic pulse. From a Center for Security Policy report: “To make matters worse, as Michael Del Rosso, the former chairman of the Institute of Electrical and Electronics Engineers’ Critical Infrastructure Protection Committee, added—even if no hostile power responds catastrophically to our vulnerability to EMP, a similar level of devastation can be caused by natural phenomena.”1
Del Rosso is a friend of mine and was one of the first people to recognize the financial terrorism that was taking place in 2008. In fact, he called me that September as Lehman was failing, and on hearing my concerns he made the initial introductions to the FBI and the Pentagon. He has been warning about the risks of EMP for years after serving on the blue-ribbon congressional commission that identified the risks.
How would a natural EMP occur? Perhaps the best example was observed in 1859:
On the morning of September 1, 1859, amateur astronomer Richard Carrington ascended into the private observatory attached to his country estate outside of London. After cranking open the dome’s shutter to reveal the clear blue sky, he pointed his brass telescope toward the sun and began to sketch a cluster of enormous dark spots that freckled its surface. Suddenly, Carrington spotted what he described as “two patches of intensely bright and white light” erupting from the sunspots. Five minutes later the fireballs vanished, but within hours their impact would be felt across the globe.
That night, telegraph communications around the world began to fail; there were reports of sparks showering from telegraph machines, shocking operators and setting papers ablaze. All over the planet, colorful auroras illuminated the nighttime skies, glowing so brightly that birds began to chirp and laborers started their daily chores, believing the sun had begun rising. Some thought the end of the world was at hand, but Carrington’s naked eyes had spotted the true cause for the bizarre happenings: a massive solar flare with the energy of 10 billion atomic bombs. The flare spewed electrified gas and subatomic particles toward Earth, and the resulting geomagnetic storm—dubbed the “Carrington Event”—was the largest on record to have struck the planet.2
Solar events like the one that Carrington observed occur on a fairly regular basis. In 1989 a minor version wiped out Quebec’s electric transmission system. We barely averted a catastrophe in July 2013 when solar flares just passed the earth:
“There had been a near miss about two weeks ago, a Carrington-class coronal mass ejection crossed the orbit of the Earth and basically just missed us,” added Peter Vincent Pry, who served on the Congressional EMP Threat Commission.
“Basically this is a Russian roulette thing,” he said. “We narrowly escape from a Carrington-class disaster.”3
We are overdue. Lloyds of London made this clear in a recent report to the insurance industry. They suggested that a full-scale Carrington event happens about every 150 years. It has been 154 years since the last one over the United States.4 Estimates are that there is a “one in eight” chance of a major natural EMP event happening by the year 2020.5
We face a few major problems in dealing with the EMP risk, whether natural or intentional. First, we lack the supply of transformers and other equipment needed to restore power quickly. We simply don’t keep enough of the thousands of large power transformers (LPTs) required to replace all we could lose. A loss of just twenty to thirty major transformers would black out a substantial part of the United States, according to J
ames Woolsey, the director of the CIA under President Clinton.6 Unfortunately, we don’t even manufacture them in the United States, and there is a long lead time to order them, even under normal circumstances. They are manufactured, at least in part, by hand.7
Secretary of Defense Donald Rumsfeld used to keep on his desk a satellite image of North and South Korea at night. He would comment that there were virtually no lights in North Korea, while South Korea was abuzz with light and life.8 While that was a telling image showing the benefits of a free versus closed society, it also serves as an ominous warning of our dependence on modern systems. An EMP over the Koreas would take South Korea back more than a century in development but perhaps have limited effect on its northern neighbor. That is what makes an EMP so appealing as an economic weapon. It can level the playing field between superpower and failed state in less than a second.
The bad news is that we don’t have any real defense against a planned EMP. We have not pursued missile defense.9 We have not hardened the grid.10 The good news is that we can still do so. Protection against a natural EMP might cost billions of dollars, and protection against a planned EMP attack might require tens of billions of dollars,11 but a successful EMP attack would wipe out trillions of dollars and could result in the death of millions of Americans.12 When you realize the stakes and that even rogue nations likely have the capability to launch an EMP, you quickly recognize that this is a mighty weapon of economic warfare. Ambassador Henry Cooper, the director of the Strategic Defense Initiative Organization under President George H. W. Bush, warns:
An EMP catastrophe also can be created by rogue states armed with nuclear weapons. North Korea already has nuclear missiles and nuclear weapons; Iran nearly so—and these two rogue states actively collaborate on both nuclear and ballistic missile development. It is also plausible that Jihadi terrorists might get their hands on a nuclear weapon—especially if Iran can get such a nuclear capability, mate it to a short range ballistic missile they can easily buy and launch it from a vessel off our coasts and detonate it over the U.S. to create a lethal EMP. A single nuclear weapon detonated at high-altitude over the center of this country could collapse the electric grid, leading to the collapse of other critical infrastructure and within a year lead to the death of several hundred million Americans. Based on extensive Department of Defense efforts during the Cold War, we (specifically, the Defense Nuclear Agency and the Services) understand EMP effects and how to protect against them, and we have applied these protective measures to harden our strategic systems—but not to harden our critical civil infrastructure. A high altitude nuclear explosion creates an EMP with three wavelength components, a mid-range one that is essentially the same as lightning, a short wavelength one that can cause severe damage to solid state electronics, and a long wavelength one that is essentially the same as that from a solar storm which would couple into the electric power grid that would transmit a massive energy pulse through the grid to focus on a few thousand large transformers, which when severely damaged would require many months to repair—if ever.13
I have been working with the EMP Coalition co-chaired by James Woolsey and former Speaker of the House Newt Gingrich. The coalition includes important experts and is addressing this serious threat.14 Concern about the EMP threat is by no means a partisan issue.15
What can you do? First, make certain that you have more than a week’s worth of food, water, and basics on hand. I will address some things you might want to have available in chapter eleven. Second, make your voice heard and demand that our government and utilities take action to defend us. Hardening the grid would add at most a few dollars a month to our electric bills. Having a defense would itself deter an attack. Investors should look for opportunities to invest in grid protection. As the public becomes aware of the threat, there will be some free-market efforts to address the problem. These could include investments in response mechanisms like food and water, emergency response, or hardening the utilities. While Y2K did not end in disaster, in part because of extensive protection measures, wise investors who took positions in solutions to the problem made an enormous amount of money.16
Network Heart Attack
An attack on computer networks is the final step outlined in Unrestricted Warfare for destroying a superpower. First, build up capital. Next, launch a sneak attack. Third, carry out a network attack:
[B]y using the combination method, a completely different scenario and game can occur: if the attacking side secretly (or quietly) musters large amounts of capital without the enemy nation being aware of this at all and launches a sneak attack against its financial markets, then after causing a financial crisis, buries a computer virus and hacker detachment in the opponent’s computer system in advance, while at the same time carrying out a network attack against the enemy so that the civilian electricity network, traffic dispatching network, financial transaction network, telephone communications network, and mass media network are completely paralyzed, this will cause the enemy nation to fall into social panic, street riots, and a political crisis.17
A cyberattack on financial markets, even if isolated, would shut down trading, preventing anyone from getting his money out of the market or putting his money in. As early as November 2010, Doug Kass, the head of Seabreeze Partners, predicted such an attack. “The Internet,” he said on CNBC, “becomes the tactical nuke of the digital age. I believe cybercrime is going to explode exponentially next year as the web is invaded by hackers.” More specifically, he predicted an attack on the New York Stock Exchange. “The aftermath will have a profound impact and cause a weeklong hiatus in trading as well as a slowdown in travel,” he continued.18
A catastrophic attack isn’t just possible, or even likely. It is inevitable, according to the best security experts in the world. Admiral J. Michael McConnell, who served as director of national intelligence under Presidents Bush and Obama, said that financial terrorists could take advantage of our reliance on technology: “What they will finally figure out is that crashing an airplane into a building gets them a lot of publicity, [but] at some point, they’re going to move to different means. They will eventually, in my view, move to the soft underbelly of the country, which is the digital infrastructure and digital dependence. And when they figure that out, a relatively small group could do strategic damage. . . . They’ll eventually figure it out.” Asked whether it is a question of when rather than if, McConnell answered in the affirmative.19 The director of the National Security Agency and U.S. Cyber Command, General Keith Alexander, confirmed that report, stating, “Securing our nation’s networks is a team sport. We need your help.”20
In fact, we’ve already had a variety of hacking attempts on NASDAQ, the system that runs the markets. Federal investigators said in February 2011 that hackers had repeatedly broken into the NASDAQ over the previous year. While the exchange’s trading platform wasn’t damaged or compromised, investigators said they didn’t know what had been accessed. As the Wall Street Journal reported, “The Nasdaq situation has set off alarms within the government because of the exchange’s critical role, which officials put right up with power companies and air-traffic-control operations, all part of the nation’s basic infrastructure. Other infrastructure components have been compromised in the past, including a case in which hackers planted potentially disruptive software programs in the U.S. electrical grid, according to current and former national-security officials.” That might have been a preliminary move by hackers in preparation for a larger strike. Tom Kellermann, a former computer security official at the World Bank, said, “Many sophisticated hackers don’t immediately try to monetize the situation; they oftentimes do what’s called local information gathering, almost like collecting intelligence, to ascertain what would be the best way in the long term to monetize their presence.”21
The attack reported by the Wall Street Journal did not, fortunately, inflict substantial damage. But such attacks are cause for alarm because they are probably state-sponsored probes of
our weakness. That’s why the National Security Agency got involved. Joel Brenner, a former head of U.S. counterintelligence under Bush and Obama, said as much: “By bringing in the NSA, that means they think they’re either dealing with a state-sponsored attack or it’s an extraordinarily capable criminal organization.” Bloomberg News suggested that the NSA’s involvement could hint at a national threat to the financial infrastructure. It would not take a full-scale hack to throw the financial system into turmoil. Even the appearance of impropriety could destroy faith in the market. Brenner said that manipulating trading could cast doubt about validity of any trade throughout the system.22
FBI director Robert Mueller said in March 2012 that the top threat to national security is cyberattacks. “We are losing data, we are losing money, we are losing ideas and we are losing innovation,” he said. “Together we must find a way to stop the bleeding.” Unfortunately, he said, America’s companies and financial system are completely unprepared for such an attack. “There are only two types of companies,” he concluded, “[t]hose that have been hacked, and those that will be.”23 Leon Panetta, a former director of the CIA and former secretary of defense, has made the same point, warning of a massive disaster that he dubbed a “cyber–Pearl Harbor.” He said, “An aggressor nation or extremist group could use these kinds of cyber tools to gain control of critical switches. . . . They could derail passenger trains loaded with lethal chemicals. They could contaminate the water supply in major cities, or shut down the power grid across large parts of the country.” Were terrorists to launch “several attacks on our critical infrastructure at one time, in combination with a physical attack . . . that would cause physical destruction and the loss of life, an attack that would paralyze and shock the nation and create a profound new sense of vulnerability.’’24
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