Cyber Warfare Advances

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In addition to artificially low interest rates which promoted a massive misallocation of capital (i.e., malinvestment), the main problem underlying the great recession – or “Greater Depression,” as Doug Casey calls it – is one of too much debt in the system.

Now the House passes a deal to throw another $2.4 trillion in debt onto the pile; and the financial markets breathe a collective sigh of relief. I don’t get it. Yes, the U.S. can continue to pay its bills for a little while longer… but paying one’s bills with an ever-increasing amount of debt is not a sound financial plan. It’s like getting a new MasterCard to pay down the Visa bill. At some point something’s got to give. And given the U.S.’s inability to seriously deal with the real problems at hand, I’d have to think that “some point” is sooner rather than later.

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Let’s take a quick look at the path we’re on.

Deficits beget debt. Here’s a visual display of the deficit situation that recently ran in Barry Ritholtz’s blog The Big Picture:

(Click on image to enlarge)

Already – through June, just nine months into the fiscal year – the deficit for 2011 has just about reached $1 trillion. Meanwhile, spending is averaging $300 billion a month, while receipts average less than $200 billion a month.

The new bill passed by the House calls for at most a $2.4-trillion deficit reduction over the next 10 years. If annual deficits of at least $1.3 trillion are already baked into the cake, however, that $2.4 trillion looks more like a drop in the bucket. And those accumulating deficits mean higher and higher debt levels going forward. National debt is already about equal to GDP, and you can bet the growth in debt will significantly outpace economic growth in the years ahead. The situation is far beyond untenable without major cuts to spending – like Social Security, Medicare, and defense – that will never occur because they are too politically dangerous.

As I was writing this introduction, I received a brief article from Chief Economist Bud Conrad that sheds some more light on the House bill and the proposed cuts, relative to the size of government. I’ll present that article first and then turn things over to Doug Hornig for a look at the state of cyber war. I’ll come back later on to give you some additional links and reads.

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How Big Is the New Budget Cut for the Size of Government?

By Bud Conrad

There has been a lot of political effort and focus on the debt issue, and that is an improvement. So how big is the current change? Congress could only get a small down payment on cuts into legislation immediately. The Congressional Budget Office (CBO) scored the cuts as $917 billion over 10 years. To get more cuts, a Joint Select Committee is tasked with coming up with another $1200 billion more. If they fail, automatic cuts of $1500 billion are planned.

10 year cuts now:  $917 B

Joint Committee:  $1,200 B

Total:  $2,117 B

So the total will be closer to $2.1 to 2.4 trillion, or 5% of expenditures. That is not enough with a current deficit at 40 % of expenditures. Compared to the projected expenditures of $45.8 trillion over this time frame, the effects will be small. A chart of the size of the initial cuts in blue compared to the projected expenditures in red puts the relative size in perspective:

(Click on image to enlarge)

The conclusion is that the best the government could do in making cuts is not enough to change the story that we will be spending more than we can afford, and that the scenario of dollar depreciation and gold rise will continue.

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Cyber Wars

By Doug Hornig

It is often alleged that our future wars will be fought largely in cyberspace, with the winner not having the best tanks and missiles, but the best gamers.

The Pentagon – long enamored of the multi-gazillion dollar fighter jets and cruisers more suitable to the last war – has often treated cyberspace as an afterthought in its drive to get ever shinier new stuff. But lately it seems to have gotten the message. Or perhaps it was just forced to by reports such as the one released by Reuters in June, which found:

* Spin-offs of the malicious code dubbed “agent.btz” used to attack the military’s U.S. Central Command in 2008 are still roiling U.S. networks today. People inside and outside the U.S. government strongly suspect Russia was behind the attack, which was the most significant known breach of military networks.

* There are serious questions about the security of “cloud computing,” even as the U.S. government prepares to embrace that technology in a big way for its cost savings.

* The U.S. electrical grid and other critical nodes are still vulnerable to cyber attack, 13 years after then-President Bill Clinton declared that protecting critical infrastructure was a national priority.

* While some progress has been made in coordinating among government agencies with different missions, and across the public-private sector gap, much remains to be done.

* Government officials say one of the things they fear most is a so-called “zero-day attack,” exploiting a vulnerability unknown to the software developer until the strike hits.

An example of the last one is the Stuxnet worm that crawled into Iran’s enriched-uranium-producing centrifuges in the summer of 2011 and screwed them up. Experts believe Stuxnet was created by the U.S. (perhaps in coordination with Israel) as an alternative to conventional bombing. But things move at warp speed in the cyberuniverse, and any would-be hacker can now download DIY Stuxnet kits from the Internet.

Government moves much more ponderously, of course, and as a result has fallen far behind the current generation of electronic break-in artists. Recent targets have included the CIA, the Senate, the International Monetary Fund, and defense contractors Lockheed Martin and L3. As for the Pentagon, it admits that its defenses are probed about 250,000 times per hour. It declines to say how successful the intruders are.

Laments Jim Lewis, a cyber expert with the Center for Strategic and International Studies, “[W]e have not kept pace with opponents. The network is so deeply flawed that it can’t be secured.”

The Pentagon thinks otherwise, and it has announced its response: The Defense Advanced Research Projects Agency (DARPA) is expected to launch the National Cyber Range by mid-2012. It’s a kind of mirror Internet that will cost an estimated $130 million to build and that will be used to test cyber defense technologies and help train the cyber warriors of tomorrow.

(So if your kids are obsessively playing World of Warcraft, that may not be as bad a thing as you think. They could be developing just the skills the military will be looking for.)

The White House is also deeply involved. It has a cyberspace security coordinator who is in the process of trying to fashion an “all-government response” that would encompass the Pentagon, FBI, DHS, and NSA. Lot of turf battles there.

Private sector companies that do classified business with these agencies are also included, especially the so-called Defense Industrial Base (DIB), a network of contractors that collectively pulls down $400 billion a year for supplying military goods and services. That one’s a tough nut to crack, as these companies tend to be understandably paranoid about information sharing.

DARPA has a few other tricks up its collective sleeve, too. Among programs under way: Clean-slate Design of Resilient, Adaptive, Secure Hosts (CRASH) intends to design new systems that are resistant to cyber attacks, and can learn and adapt to them over time. Cyber Insider Threat (CINDER) will attempt to sleuth out spy- and malware already hidden inside networks. And Cyber Genome will be able to discover, identify, and analyze malicious code and help identify the perpetrator.

Complicating matters are two new technologies. One is the explosion of smartphones, tablets, and other mobile devices, which means that attackers have that many more avenues of attack. Widespread adoption of these tools has happened so fast that security issues are only just being recognized. In the apologetic words of Rear Admiral Mike Brown, a senior DHS cyber security official, “[W]e’re semi-late to the game” in protecting mobile applications.

The other new tech is the aforementioned shift to “cloud computing,” whereby offsite providers offer network and storage resources that can be accessed remotely from a variety of computing platforms. It’s convenient but a security nightmare. “We’re trying to get to the place where warfighters or any of us can get to our information from anywhere on the planet, with any device,” a defense spokesperson told Reuters. But that kind of easy access is easily exploited. The data are vulnerable.

A recent study by CA Technologies and the Ponemon Institute that surveyed 103 U.S. and 24 European cloud computing providers found that a majority did not view security of their services as a competitive advantage. They believed that security was their customers’ responsibility, not theirs. And most did not have dedicated security personnel on staff.

How safe are we? A U.S. defense official told Reuters he would give the Pentagon just a C+ grade overall for its cyber defenses. But, “[W]e’re getting better.” And that, remember, is the top of the line. It’s unlikely that our non-military infrastructure protection, for example, would grade out any better than an F. But, hopefully, that too is getting better.

As concern over cybersecurity grows, and the cat and mouse game between hackers and targets continues, we can expect a couple of things. First, there will be ever more complex and exotic defense systems devised. That means an inevitable conflict with privacy rights, as well as a further bolstering of the all-powerful, monolithic state.

And second, there will be a proliferation of companies that cater to the demand for greater safety emanating from both government and the private sector, especially at the points where the two cross. Those who arrive firstest with the mostest will be very, very well rewarded.

[The team of experts at Casey Extraordinary Technology monitor these trends and advances in research in order to bring subscribers the best investments in the field. You can test drive a three-month subscription, risk-free.]


Additional Links and Reads

Fed May Weigh More Stimulus on Slow Recovery (Bloomberg)

In the “Who didn’t see that coming!?!” category of stories is an article from Bloomberg indicating that Federal Reserve policy makers could start weighing additional steps to prop up the recovery (read: “print billions more currency units”) after economic growth in the first half of the year fell below 1%, and economists began cutting second-half growth forecasts. QE3 is close at hand.

Misleading Words (LewRockwell.com)

This is an article by Thomas Sowell on the unfortunate triumph of misleading words over reality, which has been used to justify the vastly expanded powers and runaway spending of the federal government.

Security Theater Adds a New Act (The Freeman)

“Where are you going? What is the purpose of your trip? Where will you be staying? Who will you see there? How do you know them?” Anyone familiar with international travel will recognize such questions as a particularly unpleasant aspect of being “processed” by U.S. Immigration and Customs Enforcement (ICE). Soon Americans traveling within their own country may be similarly quizzed before being allowed on an airplane.

And that, dear reader, is that for today. Vedran Vuk will be back with you tomorrow. As always, thank you for reading and subscribing to Casey Daily Dispatch.

Chris Wood
Casey Research, LLC

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avatarDoug Casey - Casey's Daily Dispatch posted Tuesday, August 2nd, 2011.

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