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About this week’s show:

  • The U.S. is now in a duel with China for the Philippines
  • Take North Korea seriously: They have a VERY viable air defense system
  • EU will come apart soon, they were never designed to sustain a financial crises

The McAlvany Weekly Commentary
with David McAlvany and Kevin Orrick

“On today’s program, anonymous computer hacks taking data as hostage, and North Korea. Each begs the question: What is the real threat, and what will be the response?”

– Kevin Orrick

“It knocked hospitals offline. I use that because that is incredibly important. It also, with Bitcoins, allowed the criminals – I don’t like using the word hacker because there is something romantic about it, these are just thugs – you couldn’t really track who was getting the payoff. So assume that the mafia was doing shakedowns on hospitals, and you couldn’t find out who was doing the shakedown, and you couldn’t find out where the money went. That is the situation we are in now.”

– Dr. George Friedman

Kevin: You always had a tendency, Dave, to get a guest that can bring new light into a current situation. Dr. Friedman is a regular guest of ours, I would say, at least once a year. With this situation going on with the computer hacking and anonymous players taking ransom data of mission critical systems, hospitals and things that are important like that, it is important to understand what the threat is and probably what the next reaction will be, because the government, probably, at some point is going to be called to take some action.

David: We’ve talked about this topic many times, where government continues to grow as a reaction and a response to fear. And it never is a top-down imposition – “We’re going to do this, and you’re going to squirm.” It is usually on the basis of an invitation. There is fear in the marketplace, or just in the general political and social context. And government is invited to solve a problem, but then they never recede from that problem. It seems like this is one sphere where government will be invited in on a massive scale over the next few years to address something that is quickly becoming a concern – a threat to public safety, a threat to social safety, a threat to business commerce, as we understand it in the 21st century.

Kevin: So if you are looking at this from a strategic point of view, which is Dr. Friedman’s specialty, it probably would be worth looking today at the threat of changes in internet access and security and privacy, as well as the things that he can actually really fly on are Korea and the Middle East. If you can bring those things up today in the interview that would be helpful.

*     *     *

David: Dr. Freedman, it is great to have you with us again and we want to discuss with you a number of topics, starting with technology. It is very interesting that we spend hundreds of billions of dollars a year in military spending, and we try to address threats that we see as emergent. And yet, we have some – let’s call them nonconventional threats, which we do still have a hard time addressing, whether it is cyber, terror, or other forms of asymmetrical conflict. I’m just wondering what your view is on the adequacy or the inadequacy of technology today – the vulnerabilities in that space and how we might better approach it.

George: Focusing on computing, we have to understand first, we are working with Model T concepts and designs, although the personal computer was introduced in 1975, the basic architecture remains unchanged, and that architecture is the idea that there is software and hardware, and the software can be run on your computer, and your computer has no idea whether that software is malicious or not. So if somebody sends you an email and you accidentally click on it, it can cause catastrophe to your company.

And the computer industry tries to make this a stupid user issue. “Why didn’t you know not to click on it?” Well, in a company of 500 people, the probability of one person not making a mistake is zero. And so therefore, what they are doing is accepting failure on your part. There is no reason why, when we are talking about artificial intelligence, we’re talking about driving cars, that your computer can’t know that this is a phishing expedition or some other malicious attempt to get at your data. It is simply that the computing industry has developed in a way that they are constantly producing new features, and security doesn’t pay. They don’t provide security, you buy your own virus scanner, you buy your own firewall, or what have you.

Now, on the internet, the problem is anonymity. It is the only place where you can commit a crime such as stealing someone’s email or bank account information, and they have no idea who you are. On a highway you have to have a license plate. To make a telephone call you have to have a telephone number. Somehow you must be traceable. But then remember this crucial thing. None of these systems were created with an expectation that they would become mission critical. The uses outstripped, not the technological possibilities, but the understanding in society of what was being created, and the reluctance of the computer industry to act decisively.

So we are now using things that were never intended to power operations of a hospital, to control police movements around town, or whatever. And we’re using them. And they are insecure, and can be manipulated. And money is stolen and put into Bitcoins that you can’t trace to anyone. It is an extraordinary situation that won’t last.

David: There is the vulnerability, and we see that is revealed periodically, whether it is hacks or internet attacks that suggest a significant change is on the horizon. I think you are suggesting that, too. And there are many freedoms that exist today on the internet that might not exist tomorrow. As the wild west ultimately developed, new sheriffs came to town and brought a sense of law and order. What are we likely to see? A sense of safety challenged?

George: Well, if you walk in a park, and somebody mugs you, the chances are that that person can be seen by other people. The idea of an invisible person being present in the park that can do you harm is impossible. On the Internet it is possible for someone to commit a criminal act and no one have any idea who did it, with the current episodes of encrypting files in hospitals and leaving hospitals wide open to disaster. We don’t know who did it. So, one of the things that is going to happen is that there are going to have to be identifications – license plates on people. People don’t access systems without having identification.

Obviously, any system can be overcome or cheated on. But the idea that you should be able to make threats on the Internet, carry out criminal operations, in, basically, absolute safety and privacy, really goes not only counter to common sense, but even to the Constitution, because the Constitution is built around the right to legal searches. And they can’t be carried out in this environment. So it is going to change.

David: Where this gets particularly interesting – I remember having a conversation with Nazli Choucri on this many years ago – who controls the Internet? Which comes first? Government controlling data flows, operating kill switches, maintaining the details of who is doing what, when, how? Or do we see the increase in financial pressure where individuals no longer feel safe transacting online?

Look what has happened in the retail space. Amazon is a giant today, but Amazon is a giant today because, regardless of Internet insecurity, people are still willing to transact business there. Do we reach a threshold where all of a sudden the market drives the government response? Or does the government just say, “No, we’re in charge.”

The interesting thing there, of course, is if the government says, “Here’s our jurisdiction,” we are talking about a sphere that doesn’t have national boundaries. So where does that jurisdiction begin and end. You’re the political guy. Tell us how to parse this.

George: Firstly, I don’t really like the concept of government versus private. The government in the United States is heavily controlled by the public, responds to it, and at the same time, it heavily is the consumers, and so on. So at a certain point a disaster will happen, and this one could have been a disaster because encrypting all the hospital material in Britain – we don’t yet know if there were any casualties from that.

In driving cars with current technology, the possibility of hacking into it is altogether possible. Once that starts happening, and it is happening, the convenience is outweighed by the danger. And so the pressure will come, and it always does. All the people who hate government interference will demand that the government do something about it. And normally, the identification of utilization, such as automobiles, is done by the government. But you also have the telephone companies creating telephone numbers, and creating technology where you can’t use the telephone without operating from a registered system. And that can be done that way, too. But the government and corporations interact. The public, who loves their privacy, becomes appalled when their privacy is violated by individuals. So I don’t think it really is a question of that. It is a question that at a certain point the public will feel fear.

This is like what happened in Central Park in the 1970s. Central Park was a beautiful place. People would go into the park in the evening and enjoy a stroll. And then criminals began stalking them, and the demand by the public that the police protect them led to a different sort of enforcement, sometimes a brutal enforcement. But it changed. So we are now at the point where what happened this weekend was catastrophically unacceptable. It knocked hospitals offline. I use that because it is incredibly important. And it also, with Bitcoins, allowed the criminals – I don’t like using the word hacker because there is something romantic about it, these are just thugs who know how to do this stuff – you couldn’t really track who was getting the payoff. So, assume that the mafia was doing shakedowns on hospitals, and you couldn’t find out who was doing the shakedown, and you couldn’t find out where the money went. That’s the situation we are in now.

David: So here is a hard pivot in our conversation. This will be our Asian pivot. I want to visit with you about a couple of things relating to the Philippines, and also North Korea. My parents live in the Philippines, so it has been interesting from a firsthand perspective – secondhand for me, firsthand for them – to see the rise of Duterte, and I’m curious what your perspective is. Are we, in terms of our U.S. foreign policy, losing a critical source of influence in Asia?

George: Well, you have to look at the broader picture. You have China, a very weak power pretending to be a very strong power, facing a tremendous strategic problem, which is, both the South and the East China Sea are ringed by small islands that create choke points through which their ships have to pass. These choke points are easily shut down by the United States and the Americans have a propensity for putting sanctions and blockades on people. The Chinese are terrified that the United States will do that, and they are aware that their navy is nowhere near able to stop this.

So since they can’t fight the U.S. navy, since they are a global trading power and must have access to the sea, they are looking for some way to break this line. Well, Japan to Indonesia is aligned. Indonesia is not going to turn pro-Chinese. Taiwan is not going to become pro-Chinese. Japan is not going to become pro-Chinese. The weak spot in this entire link is the Philippines. Duterte’s election was not the cause of the problem, it was symptomatic of the problem, which is that the Philippines isn’t doing well, or at least not well for all the people, and they are extremely attracted to somebody who is willing to be very tough. It goes back to the Internet conversation in a way because that is what happens when insecurity arises uncontrollably. You look for a strongman.

At any rate, the Chinese look at the Philippines and say “If we have any chance of breaking the blockade potential, if the Philippines were pro-Chinese, if the Philippines gave us bases there, we would have no problem having access to the seas. So the Chinese have been giving aggressively, seeking an opening with the Philippines. And Duterte has used this very well to play off the United States against the Chinese and see what deal he can get. I suspect that he doesn’t have enough room to maneuver, for actually making a deal with the Chinese. The Filipino elite is pro-American.

But at the same time, he is doing some brilliant bargaining. And by looking unstable – that is sometimes an advantage in a poker game – he can extract concessions. And so, we are now in a kind of duel over the Philippines, the United States reaching out to them and providing assistance, the Chinese offering money and other inducements. I suspect it won’t work for the Chinese, but it is their best play.

David: So, we have thought about good fences making good neighbors, and the conflict which was at the outset when Duterte was elected – there was actually some saber-rattling between the two countries. You had the Chinese 9-line, you had the Philippines’ economic zone, and these areas overlapped. Is the solution to the 9-line just creating better economic ties where all of a sudden it doesn’t matter?

George: No. There was no duel. The Chinese never fired a shot. Neither did the Filipinos. For all the Chinese maneuvering in the South China Sea, they simply moved ships around. They did not engage in any way. So this is a rhetorical battle. It was, from the Chinese and Filipino point of view, the opening of a negotiation. If you have ever engaged in negotiation you know you might want to open by making your hardest statement possible. It woke up the United States to this, which Duterte wanted to see done.

But the real issue here is this. China is attractive to the Philippines because it is a possible source of large-scale capital, provided not because of the business opportunities, but because of the political advantage. For the Chinese, it was a relatively small amount of money. From the American point of view, there are limited economic possibilities in the Philippines for large-scale investment. But on the other hand, the Filipinos are also smart enough to know that the problem is that the United States is far away, and China is very close, and falling into their embrace is dangerous.

So my expectation here is that Duterte will use this, and eventually show up in Washington, and have a love fest with Trump, or whoever, and leave with a new package of inducements – nothing as big as the China promise, but then the Chinese may never deliver. So, that’s where it goes.

David: Well, China is also central to our questions about North Korea. And let me start by framing the issues in North Korea with this question: Is North Korea stupid? Are they crazy, or are they something else?

George: Well, they have survived since 1950. They have survived the fall of the Soviet Union. Their regime has flourished in spite of a weak economy. If they’re stupid, then they are also incredibly lucky. They’re not stupid. They understand what they are doing. Their number one goal is to preserve the regime in Pyongyang. They also understand that, being weak, they may be pushed over the edge.

So they have a strategy that is designed to make them appear, on the one hand weak – “You don’t have to worry about us.” On the other hand ferocious – “You must be very careful because if you push us too far, we have these nuclear devices.” And finally, that they’re crazy. It’s a very good posture because if someone is crazy you can’t predict his actions, and if someone is weak and acts crazy, he may do something that is not rational for himself.

And so here we have this country with a GDP on the order of Chad, sitting down with the Chinese, the Russians, the Americans, the Japanese, and the South Koreans, as if they were, alone, the equal of all of them, and are treated that way. It’s a brilliant maneuver. They have figured out how to use the levers against all these countries in such a way as to preserve the regime.

David: Nuclear weapons. Maybe you can expand on North Korea’s deterrent strategy. Is it based on hope, or is it maybe a more well-grounded strategy?

George: They don’t intend to use it. There is no indication that the North Korean elite want to die. This is not ISIS. They want to live and preserve themselves. But they also understand that, given their vulnerability, one way to deter messing with Korea is to develop a nuclear deterrent. And in developing a nuclear deterrent, that is something we respect a great deal. So that would leave us not being able to destabilize the regime.

The problem that we have in North Korea is that the transition from having a nuclear program and a viable nuclear weapon is, for the Koreans, the danger point. When it appears that they have a capable delivery system, at that point the United States must calculate whether or not the risk of them having it is greater than the risk of going to war. There is a risk of going to war and the Korean response to that would be, they have massive artillery within range of Seoul, which is about 25 million in the metropolitan area. They also have, probably, chemical weapons they could fire at Seoul.

So their response to an attempt to take out the nuclear weapons by whatever means we have, and it is not as easy as it looks, would be to try to devastate Seoul. We, in turn, would come in with aircraft to try to destroy this massive concentration of artillery. They would respond with a very advanced and capable air defense system. In other words, taking out North Korea’s capability is not nearly as easy as it looks. Wars are hard. And this is a war that the North Koreans have prepared for, for a long time. They are hoping to hold off the Americans long enough to be able to acquire a deliverable nuclear system.

At the same time they are signaling that they are not going to attack the United States. It was interesting – they made a big deal about this ICBM they just launched that can reach the United States. But also, interestingly, the launch failed. So they are signaling that they are working on it – “Don’t push us too hard or we will perfect it.” They are trying to get to that point where they are invulnerable. But simply casually starting a nuclear war is not in their interests, and these guys know what their interest is.

David: So moving to the United States, there is an interesting daily occurrence, and it is something that is announced in the media that relates to Russia, that relates to a new fascist discovered in the administration, a new anti-Semite. It is very interesting, the tone and tenor. And I don’t know if this is a media sanctioning of witch hunts, if it is a return to the McCarthy era where accusations and onslaughts are a daily event, but with political motive. What is this mayhem that we see? Has Trump brought this upon himself?

George: No, this is a social split – a crisis. We have two massive classes. One, we will call the coastal elites, but they are also called technocrats. They are the law schools, the journalists, they are the professors, they are the financial gurus, and so on. They live by ideas.

We have another class, which is the industrial working class – the white industrial working class, that is in a deep economic problem. The technocrats don’t know anybody like that. There is a bubble that has developed between the two. Trump speaks for this class, and we know he speaks for this class because when you go talk to them, they say he does. And the numbers show about 37% is what he has. This is who he speaks for.

The New York Times speaks for the technocratic elite. For the New York Times, Trump is a devil. And the media has become so extreme, it is making no attempt to be objective. They are combatants. What they don’t realize is that every time they attack Trump he gets stronger in his base. By attacking him, two things happen. One – he looks like a victim to these people. And two – they attack him on issues that really matter to them, such as, many of these are religious – Protestants and Catholics. They were taught 10 and 20 years ago that homosexuality is a sin, that abortion is wrong, and so on. They then are attacked as Deplorables by Clinton, so they become highly defensive. Trump wins, unbelievably. The elites regard this as a freakish accident that should never have happened, much like the British regarded Brexit.

And so you have two classes crunching at each other, each having certain mechanisms for mobilizing them. And what has happened is that the media has become a mechanism for attacking Trump. So everything that Trump does – and he is a very, very strange man, and behaves oddly – they turn into an impeachable offense. Every time the media does that, he accuses them of trying to destroy him by spreading malicious lies.

The media is not lying, but it is exaggerating dramatically what he has done wrong. They don’t like what he does, and you can make an argument against it, but for example, the question of him telling the Russians about this suitcase bomb. Well, the suitcase bomb was well known to intelligence communities quite a while ago because we know the British started banning computers on their airplanes from the Middle East, as did the Americans. So Trump mentioned this, and the Washington Post treats it as a major breach of security because a nation cooperating with us is now going to be revealed to be cooperating. It turns out to be Israel, which everybody knows cooperates with the United States on intelligence.

So the media approaches him, not so much inventing stories, but positioning them in such a way as he looks horrible, and then they move on to the next one, the Comey memo that came out. Each day there is something. Trump, in the meantime, attacks the media, which strengthens him. So we are caught in a dynamic here between two classes – one spoken for by the elite media, the other spoken for by various websites – and they are clashing with each other. And each time one attacks the other, the one they attack becomes stronger.

And this is something that has happened in the United States any number of times. The last time it was really this distinct was, of course, the anti-war movement where we wound up having people shot at Kent State during the Vietnam War. And before that, McCarthyism. It is not unprecedented, but it is kind of unpleasant to live through. It is also kind of odd that the Democratic Party, which had been the party of the white working class – Roosevelt’s coalition was southern racists, northern blacks, and the white working class. That was the coalition. That was the contradictory coalition that worked so well, and really now sees that declining working class, in what they call flyover country, as the problem.

It is also a problem that social mobility is very hard for the children of this class to move into the major universities, because the universities, themselves, have requirements that they can’t meet. You should work at Habitat building a house in Cuba, or all of these various things that, if you are poor, you probably have to work for the summer. So we are in a nasty social confrontation, and it will end in due course, but in the meantime the question is, can Trump survive? And he is his own worst enemy.

David: So to conclude, I would love getting the balance of power update on the Middle East. A number of years ago you said one of the fundamental shifts in the Middle East was our activity pulling the rug out from underneath established powers, and it has left it in a bit of chaos. From Syria, to Turkey, to Iran, to Saudi Arabia, how do you encapsulate the Middle East and the current balance of power struggle?

George: The center of gravity of everything is Turkey. Turkey has now moved from being a marginal power, not to being a great power yet, but certainly being a decisive power in the area. It does not want to get deeply involved, at this point, in anything having to do with ISIS. It doesn’t want to take the casualties. The Israelis are not going to get involved – that is too far away. The Saudis have been hit hard by the oil crisis and are trying to hold Saudi Arabia together in the face of that, so they can’t do it. The Iranians, oddly, are in it, and are aligned with the United States in Iraq – in Mosul. They basically control the Iraqi army. They are both Shi’ites.

So the United States has learned that it is not going to achieve its ends in the Middle East. It is not going to create a democratic government in Afghanistan, and it is not going to pacify this region. At the same time, it doesn’t know how to withdraw. So we have just seen the indication that the United States is going to send some more troops. Now, in Iraq, 150,000 troops weren’t enough to stabilize the country. We are sending out 10,000 more. We’re trying to find a way out.

But also for the United States, whatever importance the Middle East had is gone. There were two things that mattered in the Middle East – blocking the Soviet Union, which really isn’t an issue, and the Russian involvement in Syria was really marginal, but pulled great headlines. And the second thing is, oil just doesn’t matter as much. Oil doesn’t have the impact because the United States has invented a machine, if you will, that invents oil. We are pouring oil out in the United States.

And so what happens in the Saudi Arabia doesn’t matter that much. The true tragedy of the region is, it has become less important the more violent it became. And no one has the strength or the will to attempt to contain Jihadism. We may break ISIS, but as we broke Al Qaeda, and that led to ISIS, we break ISIS and the movement will generate another organization.

So until the Turks decide to make a decisive move, which I think is going to be a while yet, and the Turks are historically the ones that pacify the Arab world, in a not very pretty fashion – until that happens we will be in chaos, the United States will be on the margins there, and the U.S. and Turkey will be constantly having a game where the U.S. is trying to maneuver the Turks to taking a more active role, and the Turks are saying, “We have our own domestic insurrection among the Kurds and you are helping it. Please don’t ask us to go into Syria, ourselves.”

David: One last question. Does the proximity of Middle Eastern chaos have any negative impact to the cohesiveness of Europe?

George: Yes, certainly, but not in a direct way. Europe is incohesive because the interests of the European countries have massively diverged, economically and politically. You have southern Europe where unemployment is still staggeringly high, and Germany, where unemployment is less than 5%. These are two very different regions, two very different Europes. Add to that, Germany’s willingness to admit Muslim refugees, which, as the fourth largest economy in the world it can do. And the unwillingness of the smaller countries, countries that have five or six million people, to be overwhelmed by a million refugees. And you see the European Union coming apart. But this simply accelerates it. It has been coming apart, certainly, since 2008. The European Union was not built to withstand financial crisis. And really, when you take a look at it, in the ten years since that crisis, they really still haven’t gotten back on track, nor can they. It will become the Europe of old, the experiment that began with the European Union integration has clearly failed, and each nation in the European Union follows directives from Brussels only to the extent they want to. So Europe is still a magnificent place, but the idea that a single multilateral organization will dominate Europe, I think, was a fantasy….

David: We are grateful for your contributions on the Commentary, also for your routine writings at Geopolitical Futures, which you are Chairman of. If people want to follow you regularly, and your entire staff of writers covering world events and their implications into the public policy spheres, where is the best place for them to find you?

George: At We’re there.

David: Dr. Friedman, thank you so much for your time. We look forward to our next conversation.

George: Thank you. Bye-bye.

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Kevin: As always, Dave, George looks at the world like a lot of guys look at the chess board. He is looking at bases of power and how things will change. I think it is fascinating to look at, not only his view of North Korea, but the fact that he put that in perspective – this is a country the size, economically, of Chad. And yet, they are sitting down, as if they were a superpower.

David: Surviving since 1950, and that has been their primary objective, and they have succeeded. The regime has survived.

Kevin: Right. But they are very unpredictable. I think the thing that I like about George is, he comes to the conclusion of what is the number one goal for each player? Now, the number one goal for the player in Korea is to just keep the regime. So it is important, when making predictions about the future, it is good to know what is driving the opponent.

David: The only other thing I would add is, in reading Arms and Influence, Thomas Schelling, he makes the case that everything is a rhetorical battle, including the launching of missiles and actual military conflict.

Kevin: It is just diplomacy at a further level.

David: That’s right. And they are still awaiting some sort of rhetorical response, and to some degree, driving the conversation, if you will. So for us, we may say, “Oh, now it has deteriorated from the diplomacy table to outright war.” Schelling would say, “No, everything is still a conversation, just with a slightly different tone and tenor.

Kevin: And you don’t want to see nuclear weapons as part of that conversation.

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