Two of the biggest news stories of the year are 1) the Russian invasion of Ukraine, and 2) the debate over High-Frequency Trading following the publication of Michael Lewis' new book Flash Boys. While the two stories seemingly cover very different topics, from the view of global economic warfare, the two are highly related.
As we have shared at numerous points, Russia's invasion of Crimea has been accompanied by dramatic threats of cyber-economic warfare from both sides. From the American side, we have introduced a series of sanctions and promised escalation as needed. The Russian threats have been even more dramatic. They have indicated a willingness to destroy our financial system and even bring down the dollar as reserve currency. Presumably, this would include a serious market crash. Interestingly, Voice of Russia used the words "secret weapon" (perhaps borrowing from the title of our first book) to describe the economic attack they threatened to unleash against our economy.
Putin Prepares for a Currency War that He Thinks (Hopes?) Will Collapse America (February 11, 2013)
In addition, earlier this year (before the Russian invasion), I wrote a series of Op-Eds warning of the potential for an emerging World War III…
World War III: The Coming Cyber-Financial Attack that will Shock America (February 20, 2014)
…the likelihood of an approaching stock market crash….
THE STOCK MARKET WILL CRASH AND IT WILL HAPPEN IN MINUTES (January 20, 2014)
….and planned attacks against the U.S. dollar….
America's Achilles' Heel: Why the Dollar Could Spell the Defeat of a Superpower (January 10, 2014)
In hindsight, those warnings do seem pretty timely. With what we know now, four important questions emerge:
First, does Russia have the capacity to bring down our markets and economy?
Unfortunately, the answer seems to be yes. Or, at a minimum, they could cause serious damage. Consider this from top security experts, including the recent head of the NSA and Cyber Command, a former Treasury official who helped devise our financial warfare strategy, and a Wall Street expert who has consulted with CIA and participated in the 2009 DoD financial war games.
From General Keith Alexander, former head of NSA and Cyber Command:
Robert Lenzner, Forbes Staff 12/15/2013 @ 9:00PM |4,402 views
On the CBS program 60 Minutes tonight, National Security Agency (NSA) director Gen. Keith Alexander admitted that "a foreign national could impact and destroy a major portion of our financial system . . . and literally take down the U.S. economy."
…(Deborah) Plunkett (another NSA official spokesperson) told CBS: "Don't be fooled. There are absolutely nation states who have the capability and the intention to do just that," ie "literally take down the U.S. economy." If this revelation is widely discussed tomorrow morning, it could very well have a serious negative effect on stock prices.
This article is available online at:
From Juan Zarate, former Treasury in his book Treasury's War: The Unleashing of a New Era of Financial Warfare, warns
"the United States faces unique systemic vulnerabilities and internal weaknesses that adversaries in the coming financial wars could exploit." and the "blending of financial and cyber warfare represents the new frontier," and the United States "is uniquely vulnerable" and "unprepared to defend itself from the looming external threats and internal vulnerabilities."
Zarate in a recent interview makes it clear that we can impose sanctions but also that the Russians can hit back hard:
From James Rickards, author of just released The Death of Money:
The Darien Times on March 14, 2014
"But, Russia is not without financial weapons of its own. Russians could refuse to pay dollar-denominated debts to United States and multilateral lenders. Russia could dump the billions of dollars of United States Treasury notes they own thus driving up United States interest rates and hurting the United States stock and bond markets. Most ominously, Russia could unleash its hackers, among the best in the world, to crash United States stock exchanges. On August 22, 2013 the NASDAQ stock market crashed for half a trading day and no credible explanation has yet been offered for the crash. Hacking by Syrian, Iranian or Russian cyber warriors cannot be ruled out. This may have been a warning to the United States about enemy capabilities."
These are not out of the mainstream conclusions even though the concept may seem foreign to most Americans. The reality is that the capability does exist.
The second question then, is if the Russians are capable, how would they do it?
The clear consensus seems to be that cyber attacks could take down our markets and economy. The Heartbleed virus is just the latest example of how truly vulnerable we are. This is something we have covered at length in this Blog. Yet, to minimize retaliation, the hackers would have to achieve their objective with the fewest fingerprints possible. This is where Michael Lewis' Flash Boys comes into play. At present, most of the debate over High-Frequency Trading (or HFT) has been about whether or not it "rigs" the market, allowing traders to skim tiny profits from every trade. [The answer is yes, HFT traders do skim profits but the net economic impact may be negligible since the cost of trading has gone down and may offset the amount being skimmed to one degree or another.] This debate is followed with the question as to whether HFT makes the markets more liquid or not. [By the way, the answer is that HFT enhances trading liquidity but may diminish market liquidity by driving away average investors. And, the liquidity "dries up" in market downturns. So the few investors who remain in the market may enjoy the perception of enhanced liquidity and lower trading costs in good markets, while many others have abandoned the market all together sensing it is rigged.] The real problem with HFT isn't about skimming or liquidity, however (although those remain serious enough to demand review). The real problem is the vulnerability created by markets that trade so fast that no one really knows what is happening.
Remember the "flash crash?" Few realize that flash crashes happen all the time in the market with little explanation as to their cause. Most see them as a technical "glitch." In reality, experts understand that they could be evidence of cyber manipulation. Some even view the 2010 Flash Crash as a Weapon's Test.
It gets really frightening when you consider that the HFT trading codes at major Wall Street firms have been compromised. This happened to Goldman Sachs, for example. What we don't know is whether or not other compromises have gone undetected as Heartbleed did for years.
We know that our stock exchanges have been hacked as well. We can't be certain that malware wasn't left behind waiting for the proper trigger.
This is why Mark Cuban has been so adamant that HFT is a national security risk as explained in the video link below.
[Billionaire entrepreneur and "Shark Tank" star Mark Cuban tells attorney Lyle Roberts high frequency trading on Wall St. poses the biggest threat to U.S. national security because it could be manipulated by a "sovereign entity" for destructive ends.]
Mark Cuban is right. But cyber is not the only risk. Right now, Russia is working with China and others to replace the Western financial system. While many of our best intelligence analysts believe them incapable, it should be noted that Iran developed sophisticated workarounds to our sanctions. These workarounds serve as a model for Vladimir Putin who has far more resources at his disposal. If joined by China and elements in the Middle East, the petrodollar will be seriously threatened. So, it would be unwise to rule out the possibility of a fatal dollar attack. And, with HFT emerging in the currency markets, the risk is "force multiplied." This is a serious risk that few understand.
Beyond HFT, there are "dark markets" (sounds like something in an Avengers movie doesn't it?) that may even be more sinister. Basically, these markets allow trading to take place without any transparency–providing an opportunity for anyone with enough money to start a market panic with the right strategy. Sovereign Wealth Funds and nation states certainly have the muscle to do just that.
Now, the third question is critical: Is Putin willing?
Based on the evidence to date, we must conclude that under the right circumstances, Putin is willing to pull the trigger on what could escalate into World War III. We can remain hopeful that in the case of an all-out economic war, the doctrine of Mutually Assured Destruction would work as effectively as it seemed to during the Cold War. But, if either side sees its economic base collapsing, are we certain it would not lead to a shooting war?
This is the game of chicken that Putin has begun. It appears that he will take territory on the pretense of protecting the Russian people. If we respond, he threatens all-out economic war or worse. If we don't, he will consolidate and wait for another pretense to take more territory.
We should be aware that this strategy has risks for Putin and Russia as well. But so far, they appear to be risks he is willing to take. And, despite serious economic pain, his popularity has strengthened so far.
It is important to remember that all things being equal, we have more to lose in an all-out cyber-economic war. Our financial markets and the Internet are fully integrated into all aspects of our economy. Russia is less so, and thus less vulnerable at least in this regard.
So What Should We Be Doing About It?
Our strategy? We should mobilize to win this economic war. This will require accepting the reality that this is the new form of warfare as we have explained in this Blog and in our books, Secret Weapon and Game Plan. It will also require some serious policy changes as outlined in Game Plan. If this is WAR (and it is), we will have to sacrifice on the home front as we did to win the First and Second World Wars. We need to grow our economy rapidly, reduce the deficit and debt (without starving our military), and perhaps at least temporarily set aside some of the social experiments and regulatory engineering designed to perfect society. We will need to develop our domestic energy to its fullest and incentivize American corporations to act like they are American rather than global citizens. We will need to take steps to use our renewed economic muscle to compete globally and nurture allies where possible.
Finally, and most importantly, we need to return America to her righteous roots. Modern society has attempted to banish God from the public square as well as the marketplace. This would be antithetical to those who founded this nation and led her wartime victories.
Consider this from George Washington:
Whereas it is the duty of all nations to acknowledge the providence of Almighty God, to obey His will, to be grateful for His benefits, and humbly to implore His protection and favor; and—Whereas both Houses of Congress have, by their joint committee, requested me "to recommend to the people of the United States a day of public thanksgiving and prayer, to be observed by acknowledging with grateful hearts the many and signal favors of Almighty God, especially by affording them an opportunity peaceably to establish a form of government for their safety and happiness."
This from Thomas Jefferson (inscribed on the Jefferson Memorial):
"God who gave us life gave us liberty. And can the liberties of a nation be though secure when we have removed their only firm basis, a conviction in the minds of the people that these liberties are of the Gift of God? That they are not to be violated but with His wrath? Indeed, I tremble for my country when I reflect that God is just; that His justice cannot sleep forever."
This from Woodrow Wilson during the First World War:
Now, Therefore, I, Woodrow Wilson, President of the United States of America, do hereby proclaim Thursday, the thirtieth day of May, a day already freighted with sacred and stimulating memories, a day of public humiliation, prayer and fasting, and do exhort my fellow-citizens of all faiths and creeds to assemble on that day in their several places of worship and there, as well as in their homes, to pray Almighty God that He may forgive our sins and shortcomings as a people and purify our hearts to see and love the truth, to accept and defend all things that are just and right, and to purpose only those righteous acts and judgments which are in conformity with His will; beseeching Him that He will give victory to our armies as they fight for freedom, wisdom to those who take counsel on our behalf in these days of dark struggle and perplexity, and steadfastness to our people to make sacrifice to the utmost in support of what is just and true, bringing us at last the peace in which men's hearts can be at rest because it is founded upon mercy, justice and good will.
This, the D-Day prayer of Franklin Roosevelt:
They will need Thy blessings. Their road will be long and hard. For the enemy is strong. He may hurl back our forces. Success may not come with rushing speed, but we shall return again and again; and we know that by Thy grace, and by the righteousness of our cause, our sons will triumph.
For these men are lately drawn from the ways of peace. They fight not for the lust of conquest. They fight to end conquest. They fight to liberate. They fight to let justice arise, and tolerance and good will among all Thy people. They yearn but for the end of battle, for their return to the haven of home.
And for us at home – fathers, mothers, children, wives, sisters, and brothers of brave men overseas – whose thoughts and prayers are ever with them – help us, Almighty God, to rededicate ourselves in renewed faith in Thee in this hour of great sacrifice.
Many people have urged that I call the Nation into a single day of special prayer. But because the road is long and the desire is great, I ask that our people devote themselves in a continuance of prayer. As we rise to each new day, and again when each day is spent, let words of prayer be on our lips, invoking Thy help to our efforts.
And, O Lord, give us Faith. Give us Faith in Thee; Faith in our sons; Faith in each other; Faith in our united crusade. Let not the keenness of our spirit ever be dulled. Let not the impacts of temporary events, of temporal matters of but fleeting moment let not these deter us in our unconquerable purpose.
With Thy blessing, we shall prevail over the unholy forces of our enemy. Help us to conquer the apostles of greed and racial arrogancies. Lead us to the saving of our country, and with our sister Nations into a world unity that will spell a sure peace a peace invulnerable to the schemings of unworthy men. And a peace that will let all of men live in freedom, reaping the just rewards of their honest toil.
This from General George S. Patton:
"Those who pray do more for the world than those who fight; and if the world goes from bad to worse, it is because there are more battles than prayers. ‘Hands lifted up,' said Bosuet, ‘smash more battalions than hands that strike.' Gideon of Bible fame was least in his father's house. He came from Israel's smallest tribe. But he was a mighty man of valor. His strength lay not in his military might, but in his recognition of God's proper claims upon his life. He reduced his Army from thirty-two thousand to three hundred men lest the people of Israel would think that their valor had saved them. We have no intention to reduce our vast striking force. But we must urge, instruct, and indoctrinate every fighting man to pray as well as fight. In Gideon's day, and in our own, spiritually alert minorities carry the burdens and bring the victories.
"Urge all of your men to pray, not alone in church, but everywhere. Pray when driving. Pray when fighting. Pray alone. Pray with others. Pray by night and pray by day. Pray for the cessation of immoderate rains, for good weather for Battle. Pray for the defeat of our wicked enemy whose banner is injustice and whose good is oppression. Pray for victory. Pray for our Army, and Pray for Peace.
And this from John F. Kennedy:
The problems we face are complex; the pressures are immense, and both the perils and the opportunities are greater than any nation ever faced. In such a time, the limits of mere human endeavor become more apparent than ever. We cannot depend solely on our material wealth, on our military might, or on our intellectual skill or physical courage to see us safely through the seas that we must sail in the months and years to come.
Along with all of these we need faith. We need the faith with which our first settlers crossed the sea to carve out a state in the wilderness, a mission they said in the Pilgrims' Compact, the Mayflower Compact, undertaken for the glory of God. We need the faith with which our Founding Fathers proudly proclaimed the independence of this country to what seemed at that time an almost hopeless struggle, pledging their lives, their fortunes, and their sacred honor with a firm reliance on the protection of divine providence. We need the faith which has sustained and guided this Nation for 175 long and short years. We are all builders of the future, and whether we build as public servants or private citizens, whether we build at the national or the local level, whether we build in foreign or domestic affairs, we know the truth of the ancient Psalm, "Except the Lord build the house, they labour in vain that build it."
The conclusions should be clear. First, we are in a very dangerous war. Second, we must do everything we can to win it. And third (and most important), to win it, we must cry out to Almighty God in repentance as did many of our nation's heroes. Perhaps these excerpts from an Abraham Lincoln Proclamation sum it best:
"…it is the duty of nations as well as of men, to own their dependence upon the overruling power of God, to confess their sins and transgressions, in humble sorrow, yet with assured hope that genuine repentance will lead to mercy and pardon; and to recognize the sublime truth, announced in the Holy Scriptures and proven by all history, that those nations only are blessed whose God is the Lord.
And, insomuch as we know that, by His divine law, nations like individuals are subjected to punishments and chastisements in this world, may we not justly fear that the awful calamity of civil war, which now desolates the land, may be but a punishment, inflicted upon us, for our presumptuous sins, to the needful end of our national reformation as a whole People? We have been the recipients of the choicest bounties of Heaven. We have been preserved, these many years, in peace and prosperity. We have grown in numbers, wealth and power, as no other nation has ever grown. But we have forgotten God. We have forgotten the gracious hand which preserved us in peace, and multiplied and enriched and strengthened us; and we have vainly imagined, in the deceitfulness of our hearts, that all these blessings were produced by some superior wisdom and virtue of our own. Intoxicated with unbroken success, we have become too self-sufficient to feel the necessity of redeeming and preserving grace, too proud to pray to the God that made us!
Therefore, in the tradition of Washington, Jefferson, Wilson, Roosevelt, and Patton, recognizing the global economic war emerging, and the wisdom of Lincoln, I humbly suggest that the people of God return to Him in accordance with 2 Chronicles 7:14:
2 Chronicles 7:14 King James Version (KJV)
"If my people, which are called by my name, shall humble themselves, and pray, and seek my face, and turn from their wicked ways; then will I hear from heaven, and will forgive their sin, and will heal their land."
This is the most important thing we must do if we want to win the economic war and preserve our freedom.