19 FEB 16 – Executive Intelligence Summary

EXECUTIVE INTELLIGENCE SUMMARY – 19 FEB 16

The National PMESII section is a break down of national- and regional-level events and trends.  Appendix: Collection of acronyms and definitions used.

[wcm_nonmember] In this EXSUM…

• Cartel impunity in Mexico and the border region
• Threats to the U.S. military’s supply chain give China geopolitical advantage
• Chinese firm agrees to buy its first U.S. stock exchange
• Are we moving to a cashless society? Statistics say…
• What’s next for cyber attacks on the U.S. power grid?
• The Internet of Things: DNI’s next intelligence gatherer

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National PMESII:

Political/Government:

Earlier this week, we re-published a 2014 interview with former Navy SEAL Matt Bracken.  In the interview, Bracken discusses what he sees as SHTF implications, including that many Americans may find themselves living in the Third World.  He specifically cited corruption among law enforcement officers as a major hallmark of these living conditions.  To get a glimpse into what that might mean for the future of the U.S., we need look no further than to conditions in Mexico.

A 2016 Center for Impunity and Justice Studies (CESIJ) at Universidad de Las Américas report (download in Spanish) found that an estimated ninety-nine percent (99%) of crimes in Mexico go unpunished in the judicial system, and less than five percent (5%) of crimes result in convictions.  CESIJ authors explain that only about seven percent (7%) of crimes are reported, and that a lack of trust in authorities, along with potential reprisals by gangs and cartels, are the driving factors in unreported crime.

(AC: Just how bad things will get in the States is still up for debate, however, there are already areas of the U.S. that are beginning to resemble Mexico; namely in the areas that actually border Mexico.  It’s not uncommon to hear stories of cartels intimidating U.S. ranchers along the Mexican border.  According to sources in these areas, by pushing ranchers off the land, the cartels are, for all intents and purposes, moving the Mexican border north, and creating areas where they can operate with impunity.  Things are so bad that in 2014, the FBI built a task force based out of McAllen, Texas to weed out cartel corruption in U.S. law enforcement.

Reminiscent of the Swat Valley in Pakistan, where the Pakistan Army fought the Taliban, it’s difficult for me to see the United States getting serious about border security without having to fight the cartels, the corruption in law enforcement, and the counterintelligence problems that each of these is going to bring.  As much as Texans may like the idea of the Texas Redoubt, the state will be facing some very significant problems between urban gangs that operate in metropolitan areas and the cartels that already own small parts of Texas.)

 

Military/Security/Defense:

A Government Accountability Office (GAO) report published on 11 February (download) calls for the Department of Defense (DOD) to develop a strategy to identify and secure rare earth materials critical to national security.  The GAO report states that 15 rare earth materials are deemed “critical” for the DOD, yet there is currently no plan to secure the materials for use in weapons development and manufacturing.  Rare earth materials are currently used in precision-guided munitions, lasers, communication systems, radar systems, avionics, night vision equipment, and satellites.  Upwards of ninety percent (90%) or more of rare earth materials processing occurs in China, making the U.S. supply chain vulnerable to the whims of geopolitical advantage and bargaining. (AC: China has the largest rare earth ore deposits, which is roughly three times more than U.S. deposits.) The GAO previously cited industry estimates that U.S. development of the required infrastructure necessary to “rebuild” a supply chain capable of sustaining U.S. needs would take 15 years.

(AC: Access to processed rare earth materials is a national security imperative.  The Navy’s Aegis AN/SPY-1 radar system, also used by South Korean, Japanese and Australian navies, requires the replacement of a rare earth material as a part of its lifetime maintenance.  Additionally, the navigation system of the M1A2 Abrams tank also requires rare earth materials.  In 2009, the DOD reported that shortages in the rare earth materials supply chain had caused delays in weapons systems production.

In a prolonged, high-intensity conflict such as a world war, a lack of processed rare earth materials could degrade the readiness and operations of small parts of U.S. military, mainly in manufacturing.  National stockpiles would mitigate some of the risk posed from being cut off, however, U.S. allies like South Korea and Australia could experience more severe problems, especially as global demand for rare earth materials grows.)

Economic/Financial:

Last week, a Chinese investment firm agreed to purchase the Chicago Stock Exchange (CSE) from CHX Holdings Inc., which includes minority owners Bank of America, Goldman Sachs, and JPMorgan Chase.  While the deal still needs to be passed by the Securities and Exchange Commission, this move would allow Chinese companies direct access to American investors, as the CSE’s new owners control which stocks are traded on its floor.

(AC: As China is set to break last year’s record for U.S. investment, let’s consider a few perspectives.  ‘Private’ capital from China continuing to scoop up U.S.-based companies and real estate sends three messages to me.  The first is often overlooked:  it’s estimated that at least half, if not two-thirds, of Chinese espionage is directed at economic and industrial targets.  Owning a stock exchange would provide significant cover for China to continue espionage activities among companies active on the exchange.  It also cements business relations between China and U.S.-based corporations, extending the reach of Chinese espionage. 

The second message is that is that lots of wealth is being created in China and investors need somewhere else to store it.  Central and Southeast Asia are booming right now.  Seven of the top ten fastest growing economies are in China’s front yard or at their back door.  The other three are in Africa, where Chinese investment is also heavy.  There are plenty of other places where investors can put their money, however, capital is flooding out of China right now because Chinese investors feel that their money is safer in the U.S.  Excluding the obviously favorable terrain for espionage operations, Chinese ownership of the CSE is simply seen as a good investment.  Last year, their government eased restrictions on specific foreign investments, paving the way for the purchase of U.S. real estate that met residential needs for Chinese businessmen, however loosely defined that is.  This is a continuing visible trend where Chinese investors, including those who are socioeconomically upwardly mobile, can try to escape the controls of the Chinese Communist Party.

And the third message is that Chinese investors are any of the following: 1) unaware of America’s fiscal cliff, in which case they’ve joined the prestigious club of those who led the “great economic recovery” of 2015.  2) trusting that their hundreds of billions of dollars worth of investments will be protected through the downward spiral, which lends credibility to the theory that conditions will stabilize, instead of collapse, after the next global recession.  Or 3) Chinese investors are aware of the deteriorating economic and financial conditions, but believe that America will fare better than China during the coming global recession and subsequent reset.)

 

Social/Demographic:

Earlier this week, former Treasury Secretary Larry Summers suggested scrapping the production of $100 bills and added that the U.S. Treasury should examine killing the $50 bill, too.  Citing a Harvard paper that $100 bills enable corruption, and that drug gangs and cartels can smuggle and transport larger amounts of money through larger bills, Summers also stated the case that removing the larger denominations would cut down on tax evasion and “make the world a better place.”

As talks about moving to a “cashless society” gain traction, I think it’s important to examine just how cashless our society already is.  Here are some statistics to measure where we are in the cash-to-cashless society spectrum.

• In a Rasmussen Report from January of this year, sixty-nine percent (69%) of American adults under the age of 40 have gone one week without purchasing anything using cash.
• In the same report, just twenty percent (20%) of Americans say they use cash at the grocery store while sixty-nine percent (69%) use a debit or credit card.
• About a third of survey respondents said they use cash while dining out, compared to sixty-four percent (64%) who use debit or credit cards.

(AC: This should concern us all for at least a couple of reasons; the first and most obvious of which is that a cashless society is more easily tracked and controlled.  Opening a page from 1984, governments will use cashless societies to punish political dissent and “unregistered” free speech simply by turning off purchasing abilities.  We can call the Harvard paper and Larry Summers’ Washington Post article a trial balloon, but there are good arguments both for and against the likelihood of a cashless society within the next couple generations.  On the ‘con’ side, consider increases in cyber attacks and identity theft as two great reasons to keep cash.  Not only will we never defeat cyber attacks, but also we stand a greater risk of a major financial cyber attack, even cyber-meddling, because we’ve fallen behind the capabilities that cyber threats have gained.  And in the event of an economic collapse, Americans who survive the resulting turmoil may never want to go back to having digital ones-and-zeroes in the bank ever again.  We can see how the Great Depression changed the culture of an entire generation, and so we can likely expect the same kinds of attitudes resulting from events in the early 21st century.  On the ‘pro’ side, an economic collapse, a la Cloward-Piven, would better enable governments to provide welfare through expansion of the EBT card, which has already made an estimated half a trillion dollars in spending “cashless” over the past ten years.  The calculus is simple: more people in obvious need, the more demand for welfare from government.

The second reason we should be concerned with moves to a cashless society is that studies show Americans spend more money when using plastic, compared to using cash.  Robert Frank, an economics Professor at Cornell University, cited that when McDonald’s started accepting plastic cards, the average purchase price went from $4.50 to $7.  And we can largely point to the fact that paying with a card is easier than paying with cash, and less painful, and that paying with debit and credit cards leads to higher levels of impulse buying.)

 

Infrastructure/Energy:

In a first for the world, investigators this month released details proving that a cyber attack disrupted the power grid in Ukraine late last year. The online attack destroyed computers and targeted redundancy systems, successfully knocking out power to hundreds of thousands of Ukrainians.

Previously, there have been two confirmed cases where a cyber attack has caused physical damage: the first was a U.S.-Israeli attack involving Stuxnet, a computer worm that targeted Iranian nuclear facilities. The second was an attack against a German steel mill, resulting in “massive” damage after a blast furnace was prevented from being shut down.

U.S. officials have expressed major concern over the health of the three power grids in the U.S. and their susceptibility to cyber attack. As we reported in a previous Executive Intelligence Summary, DHS will have spent $6 billion dollars on the Einstein software created to prevent cyber attacks from affecting U.S. networks. Unfortunately, Einstein had a 94% failure rate when finding common vulnerabilities, according to a Government Accountability Office report.

(AC:  U.S. cyber security is lacking, especially in the face of so many determined adversaries.  Earlier this month, the information of over 9,000 DHS and 20,000 FBI employees was leaked through a simple online social engineering attack.  While a wide scale attack on the power grid is unlikely right now, foreign meddling in and mapping of grid infrastructure has been well-documented.  China, Russia and numerous other nations maintain the asymmetric ability to attack the U.S. power grid, if pushed.  The ironic part about the slowly declining military might of the U.S. is that the stronger it became conventionally, the more its adversaries sought unconventional and asymmetric means to fight it.  In short, it was responsible for creating its own worst enemies.  And these adversarial nations heavily rely on asymmetric capabilities, including economic and cyber warfare, to deter conventional forces and protect their national sovereignty.)

 

Information Systems/Surveillance/Communications:

Director of National Intelligence James Clapper admitted in congressional testimony that the U.S. Intelligence Community may use the “Internet of Things” (AC: Google Nest thermometers, refrigerators, cars, home security systems, fitness watches, anything connected to the Internet) to exploit and surveil citizens’ activities.

“In the future, intelligence services might use the [internet of things] for identification, surveillance, monitoring, location tracking, and targeting for recruitment, or to gain access to networks or user credentials,” Clapper said.  With an ever connected world from Bluetooth headphones to electric utility smart readers, to wireless baby monitors and camera feeds, to Fitbits and self driving cars, all these devices use Internet connectivity to provide access to users.  Most consumer electronic devices that make up the Internet of Things (IoT) are not protected with encryption and are quite easily exploited by hackers or cyber stalkers.  Law enforcement communities have already begun to capitalize on the ability to use citizens’ own cameras against them during investigations.

(AC: Sensors that can be commandeered by both law enforcement and cyber criminals not only make for easy spying into the lives of people in their homes, but also increases the surface area of persistent surveillance. The U.S. Intelligence Community entering itself into the electronic realm of domesticity is a real turning point for surveillance and, given the track record of intelligence agencies’ blanket collections of domestic data without warrants, we can expect “collect now, get prosecuted when the need arises” to become more frequent going into the future.)

Appendix:

AC: Analyst Comment; an opinion, explanation or clarification

CESIJ: Center for Impunity and Justice Studies

CSE: Chicago Stock Exchange

DHS: Department of Homeland Security

EXSUM: Executive Intelligence Summary

GAO: Government Accountability Office

IoT: Internet of Things

LE: Law Enforcement

OSINT: Open Source Intelligence

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