Olduvaiblog: Musings on the coming collapse

Home » 2013 » November » 16

Daily Archives: November 16, 2013

No inflation to see here….

November 16, 2013 12:04 pm / Leave a comment

No inflation to see here…..

One of the biggest lies in finance is this perpetual deception that inflation is good.

Ben Bernanke, the current high priest of US monetary policy, recently remarked that it’s “important to prevent US inflation from falling too low.”

Well of course, we wouldn’t want that, would we? Just imagine the chaos and devastation that would ensue if the cost of living actually remained… you know… the same.

One shudders at the mere thought of price stability.

Of course I jest. Fact is, inflation benefits those who are in debt up to their eyeballs at the expense of people who have been financially responsible.

Yet economists have somehow managed to convince people that inflation is just and necessary.  We all know inflation exists. But we’ve been programmed to shrug it off as if it’s a natural part of the system.

The even greater deceit is how they report the figures.

Governments all over the world lie about inflation; they do this because inflation has such a huge impact in monetary policy.

The playbook they all use is very simple– as long as inflation is ‘low’, then central bankers can print money. So they have a big incentive to underreport it.

Quoting a report from the US Department of Labor, for example, a recent headline from Reuters stated “U.S. consumer prices rise, but underlying inflation benign”.

I’m not entirely sure how inflation can be ‘benign’ while consumer prices are simultaneously rising.

Yet this is the modern day doublethink coming from the Ministry of Truth that we are all expected to unquestioningly believe.

Inflation does exist. I’ve seen it all over the world as I travel. In India right now, the reported inflation figure just hit 10% at a time when the economy is sagging.

In Bangladesh, workers are now rioting over rising cost of living, which far exceeds the proposed wage hikes that are on the table.

In the Land of the Free, the average price of a movie ticket is $8.38 earlier this year, another record high. Walnut farmers in California are now reaping record high prices on their crop.

And of course, McDonald’s is now killing their once popular dollar menu as they can no longer afford to sell anything at that price.

There are examples everywhere. And this also goes for asset price inflation.

We can see many stock and bond markets near their all-time highs. But then there are other asset classes… like farmland in Illinois, which is now selling for $13,600 per acre.

With an average yield of 160 bushels per acre, the net financial return after paying variable costs is less than 2%. It just doesn’t make any sense.

And in the art world, a Francis Bacon triptych just sold for a record $142 million at Christie’s in New York.

Everywhere you look, there’s overwhelming evidence of bubbles and price hikes. It’s simple. There’s too much money in the system.

Not only is this destructive, it’s the height of deceit to tell people that there’s no inflation.

 

Bad News for Keynesians: Data Shows the Austerians Are Right | CYNICONOMICS

November 16, 2013 11:37 am / Leave a comment

 

Anders Aslund of the Peterson Institute recently made an interesting argument about Europe’s winners and losers. In a critique of Paul Krugman’s advice to Europe’s political leaders, he compares economic performance of the southern European laggards to the northern countries and, in particular, the Baltic states.

Aslund concludes that:

Today, the record is clear. The countries that have followed [Krugman’s] advice and increased their deficits (the South European crisis countries), have done far worse in terms of economic growth and employment than the North Europeans and particularly the Baltic countries that honored fiscal responsibility.

He also links fiscal adjustments to structural reforms:

Thanks to greater structural adjustment, the growth trajectory is likely to be higher in countries that quickly and enthusiastically embrace these reforms than elsewhere. Accordingly, the three Baltic countries that suffered the largest output falls at the outset of the crisis because of a severe liquidity freeze returned to growth within two years and have, over the same period, enjoyed the highest growth in the EU. By contrast, Greece, with its back-loaded fiscal adjustment, as recommended by Krugman, has suffered from six years of recession.

By comparing past reforms to recent growth, Aslund takes a sensible approach. But he focuses mostly on the tiny Baltics and secondly on continental Europe, which begs the question:  What about larger countries everywhere?

Let’s have a look.

We start with every country that has both a global GDP share of greater than 0.25% in 2007 (pre-global financial crisis) and sufficient data on fiscal balances and growth. This is 47 countries. We then divide the group into a European sub-group (23 countries) and a non-European sub-group (24 countries). For each sub-group, we compare real GDP growth for 2010 to 2012 (post-GFC) to the average structural budget balance for 2008 and 2009 (during the GFC).

Here are the results:

growth and budgets chart 1

growth and budgets chart 2

Not only is there a positive relationship between stronger public finances during the crisis and faster post-GFC growth, but the relationship holds both within and outside Europe. (For those who like statistics, the F-stat for the European regression is significant at 99.9%, while the other regression is significant at 90% but not 95%.)

Conclusions

We have two observations. First, the results may help explain why Keynesian pundits resort to nonsensical arguments. They often claim that poor performance in countries attempting to contain public debt proves austerity doesn’t work, which is like deciding your months in rehab stunk, and therefore, rehab is bad and heroin is good. A more honest approach is to compare fiscal actions in one time period with results in later periods, after the obvious short-term effects have played out. But if Keynesians did that, they would reveal that their own advice has failed.

Second, the effects discussed by Aslund don’t receive enough attention. As Tyler Cowen (who gets credit for the pointer) wrote, Aslund’s perspective “is underrepresented in the economics blogosphere.”

And that includes our wee blog.

Regular readers know that we’ve presented research on long-term fiscal policy effects. (For example, see our historical study of 63 high government debt episodes, or our Fonzie-Ponzi theory.) We’ve also argued that the short-term consequences of fiscal tightening, often said to support Keynesian policies as noted above, actually do just the opposite. (Consider that fiscal tightening is motivated by today’s massive debt burdens, and these happen to be explained best by Keynesianism – the deficit spending policies of the past that hooked economies on unsustainable finances in the first place.)

But until now, we haven’t offered research on intermediate-term effects – horizons of 2-5 years as in the charts above. And this evidence supports Aslund’s conclusions.Policymakers should heed his argument that “front-loaded fiscal adjustment quickly restores confidence, brings down interest rates, and leads to an early return to growth.”

(Click here for the country-by-country data that was used in the charts.)

Bookmark and Share

 

Bad News for Keynesians: Data Shows the Austerians Are Right | CYNICONOMICS.

 

 

Disillusioned in Dismayland – Collapse of Industrial Civilization | Finding the Truth behind the American Hologram

November 16, 2013 9:32 am / Leave a comment

Collapse of Industrial Civilization | Finding the Truth behind the American Hologram.

original

Capitalism has, throughout its history, built itself off the backs of the weak through dispossession, slavery, colonialism, technology and military power. Protecting the capitalist system into the 21st century, U.S. military served as the all-powerful proxy force of the global corporate elite. In the waning days of modern-day civilization, transnational corporations found even more ways to amass power and squeeze out every last penny from the Earth to the gods of capital. In the name of ‘free trade’, secretive agreements with alphabet soup-acronyms like TTP and TPIP were concocted to protect and expand profits as well as investor returns at the expense of all else, including the sovereignty of nations and the very habitability of the planet. Corporations became the new kings and queens, tsars and tsaritsas, bishops and popes. The last grab for what was left could now be done more swiftly while circumventing the laws of nations.

“…Capitalism has an inbuilt wondrous capacity of resurrection and regeneration; though this is capacity of a kind shared with parasites – organisms that feed on other organisms, belonging to other species. After a complete or near-complete exhaustion of one host organism, a parasite tends and manages to find another, that would supply it with life juices for a successive, albeit also limited, stretch of time.

A hundred years ago Rosa Luxemburg grasped that secret of the eerie, phoenix-like ability of capitalism to rise, repeatedly, from the ashes; an ability that leaves behind a track of devastation – the history of capitalism is marked by the graves of living organisms sucked of their life juices to exhaustion…” ~ Zygmunt Bauman

In a world of finite resources controlled by a tiny capitalist class, there would eventually only be two classes remaining – the über-wealthy or global elite and the vast underclass of disposable workers who eked out a subsistence existence. The wealth of society continued to be funneled upwards to the corporate overlords by way of deregulation, privatization, low or nonexistent tax rates, control of the legal system, and the cutting away of any last scraps of a social safety net.

Preoccupied by their digital screen devices and satiated on mass-produced junk food, the plebs never really noticed they were living in an open-air prison. In the meantime, the walls of a police state rose up to protect the sociopathic elite. As long as the ‘consumers’ were kept in a continual state of ‘amusement madness’ and on the treadmill of work exhaustion, there would be no time for contemplating the reality of climate change, the ever-widening wealth gap, the rise of a corporate fascist state, or the disappearance of the natural world.

“Living in an age of advertisement, we are perpetually disillusioned. The perfect life is spread before us every day, but it changes and withers at a touch.“
~ J. B. Priestley

hollywood_cliff

This Ponzi scheme economy was so entrenched in the psyche of the general populace that essentially none questioned its validity, even in the face of increasingly chaotic weather and rising seas, mountains of toxic waste, lifeless oceans, epidemic industrial disease, and grotesque wealth maldistribution. The right to seek profit trumped the health and safety of humans, the stability of the environment, and the legal recourse of governments on behalf of their citizens. National borders were effectively erased and a global corporatocracy now ruled the planet. Ironically, the one world government feared by so many right-wing conspiracists had become reality without any protest from them.

Acid rain and erratic weather, the unintended consequences of half-baked geoengineering fixes, forced most food production into industrial greenhouses. Due to the chemical pollution levels in the environment, all water had to be treated before it was used for anything, and gas masks became ‘everyday outdoor wear’ like hats and umbrellas. Most stayed indoors to escape such hazards, immersing themselves in the artificial environments of virtual reality software. Zoos became the only sanctuaries for wildlife, their sperm safely kept frozen for the day humans might want to de-extinctify them. National parks were privatized and plastered with corporate logos. The ranks of the homeless and destitute swelled, but most soon found themselves living inside the cell of a private, for-profit prison where they toiled away as cheap labor contracted by the corporations. Such crises were always looked upon as business opportunities, a niche to fill in the profit-seeking mind of homo economicus. Commodification and commercialization of everything became completely normalized.

20130207-214730

Taken to the extreme and turned into a rigid belief system, all ideologies can become dangerous. When the ethics of a society bow to laissez-faire capitalism, life in the U$A becomes a cruel joke:

Need I go further? The day that the movie ‘Idiocracy’ is looked upon as genius and prophetic, civilization will have become a parody of itself. I think that day has arrived.

 

Idiocracy

Idiocracy

 

Water under pressure – Inside Story – Al Jazeera English

November 16, 2013 9:24 am / Leave a comment

Water under pressure – Inside Story – Al Jazeera English.

Water is under pressure, and disputes over the precious resource are fuelling tensions in regions across the world.

“We never know the worth of water until the well is dry,” a 17th century scholar once said. Those words strike a chord in the modern world, raising concerns about the risks and challenges of potential conflicts.

An international conference is taking place at The Hague in the Netherlands to discuss issues around water security and peace.

Half of the world lacks access to proper sanitation. Somewhere between 1.5 million and 2.5 million people die every year simply because of a lack of access to a safe, stable water supply. So in terms of crises, this is as big as anything. This is as big as HIV/AIDS or malaria, and it’s bigger than just about anything else in terms of destruction. It’s bigger than tsunamis, earthquakes, all the wars in any given year put together.

Aaron Wolf, Oregon State University

The two-day event, which began on Thursday, sees analysts, negotiators and scientists gathered to discuss ways to avoid future conflicts over water.

Delegates there are promoting a new catchphrase: water diplomacy.

They are emphasising the need for cooperation, negotiation and arbitration to address recurring conflicts, and to head off the risks of potential wars over water.

The United Nations estimates that 783 million people, or 11 percent of the world’s population, do not have access to clean water.

And what fresh water there is, is coming under increasing pressure from population growth, pollution and global warming.

Conflicts over water generally fall into two categories.

The first is simply a fight between two groups over water itself for consumption, sanitation and commerce.

The second conflict is that which arises from the way we deal with water scarcity, for instance, the impact a new dam might have on a community downstream, or the privatisation of water – a trend that has taken root in some South American countries – where it is being sold as a commodity, like oil.

Disputes over water are common around the world.

Already, the construction of the Belo Monte Dam in Brazil, expected to be the world’s third-largest, has angered indigenous people in the Amazon Basin.

And a series of dams have reduced water flow from the Tigris and the Euphrates, causing tension between Turkey, Iraq and Syria. Syria and Iraq have previously fought minor skirmishes over the Euphrates River.

Five regions in central Asia are also competing for water from two sources, the Syr Daria and Amu Daria Rivers.

Some 95 percent of Egypt’s population depends on the Nile River for its water supply, but the Nile runs through 10 countries, and those in the Nile basin want a greater share of the river’s water supply.

Ethiopia is also building a dam on the Blue Nile, one of the main sources of the Nile River, and the biggest dam construction project in Africa, which has become a cause for concern.

Water rights are a major part of the Israeli-Palestinian conflict, as the only water resource for the Palestinians is completely controlled by Israel.

So, why has water, the source of life, become a source of tension?

And as populations grow and supplies decline, what can be done to safeguard the world’s most precious resource?

To discuss this, Inside Story, with presenter Sue Turton, is joined by: Patrick Huntjens, the head of Water Diplomacy at The Hague Institute for Global Justice, which organised this week’s conference; Hakan Tropp, the managing director of the Knowledge Services department at the Stockholm International Water Institute; and Aaron Wolf, the director of the Water Conflict Management Programme at Oregon State University.

“Water security is a major issue on the international agenda. But in practice we can see that cooperation over water is very difficult. So in this conference we are trying to question how we can improve existing tools and methods for solving water conflicts and water prevention, and what diplomatic tools are needed to address recurring conflicts.”

Patrick Huntjens, The Hague Institute for Global Justice

 

90 Years Ago: The End of German Hyperinflation – Thorsten Polleit – Mises Daily

November 16, 2013 9:09 am / Leave a comment

90 Years Ago: The End of German Hyperinflation – Thorsten Polleit – Mises Daily.

On 15 November 1923 decisive steps were taken to end the nightmare of hyperinflation in the Weimar Republic: The Reichsbank, the German central bank, stopped monetizing government debt, and a new means of exchange, the Rentenmark, was issued next to the Papermark (in German: Papiermark). These measures succeeded in halting hyperinflation, but the purchasing power of the Papermark was completely ruined. To understand how and why this could happen, one has to take a look at the time shortly before the outbreak of World War I.

Since 1871, the mark had been the official money in the Deutsches Reich. With the outbreak of World War I, the gold redeemability of the Reichsmark was suspended on 4 August 1914. The gold-backed Reichsmark (or “Goldmark,” as it was referred to from 1914) became the unbacked Papermark. Initially, the Reich financed its war outlays in large part through issuing debt. Total public debt rose from 5.2bn Papermark in 1914 to 105.3bn in 1918.[1] In 1914, the quantity of Papermark was 5.9 billion, in 1918 it stood at 32.9 billion. From August 1914 to November 1918, wholesale prices in the Reich had risen 115 percent, and the purchasing power of the Papermark had fallen by more than half. In the same period, the exchange rate of the Papermark depreciated 84 percent against the US dollar.

The new Weimar Republic faced tremendous economic and political challenges. In 1920, industrial production was 61 percent of the level seen in 1913, and in 1923 it had fallen further to 54 percent. The land losses following the Versailles Treaty had weakened the Reich’s productive capacity substantially: the Reich lost around 13 percent of its former land mass, and around 10 percent of the German population was now living outside its borders. In addition, Germany had to make reparation payments. Most important, however, the new and fledgling democratic governments wanted to cater as best as possible to the wishes of their voters. As tax revenues were insufficient to finance these outlays, the Reichsbank started running the printing press.

From April 1920 to March 1921, the ratio of tax revenues to spending amounted to just 37 percent. Thereafter, the situation improved somewhat and in June 1922, taxes relative to total spending even reached 75 percent. Then things turned ugly. Toward the end of 1922, Germany was accused of having failed to deliver its reparation payments on time. To back their claim, French and Belgian troops invaded and occupied the Ruhrgebiet, the Reich’s industrial heartland, at the beginning of January 1923. The German government under chancellor Wilhelm Kuno called upon Ruhrgebiet workers to resist any orders from the invaders, promising the Reich would keep paying their wages. The Reichsbank began printing up new money by monetizing debt to keep the government liquid for making up tax-shortfalls and paying wages, social transfers, and subsidies.

From May 1923 on, the quantity of Papermark started spinning out of control. It rose from 8.610 billion in May to 17.340 billion in April, and further to 669.703 billion in August, reaching 400 quintillion (that is 400 x 1018) in November 1923.[2] Wholesale prices skyrocketed to astronomical levels, rising by 1.813 percent from the end of 1919 to November 1923. At the end of World War I in 1918 you could have bought 500 billion eggs for the same money you would have to spend five years later for just one egg. Through November 1923, the price of the US dollar in terms of Papermark had risen by 8.912 percent. The Papermark had actually sunken to scrap value.

With the collapse of the currency, unemployment was on the rise. Since the end of the war, unemployment had remained fairly low — given that the Weimar governments had kept the economy going by vigorous deficit spending and money printing. At the end of 1919, the unemployment rate stood at 2.9 percent, in 1920 at 4.1 percent, 1921 at 1.6 percent and 1922 at 2.8 percent. With the dying of the Papermark, though, the unemployment rate reached 19.1 percent in October, 23.4 percent in November, and 28.2 percent in December. Hyperinflation had impoverished the great majority of the German population, especially the middle class. People suffered from food shortages and cold. Political extremism was on the rise.

The central problem for sorting out the monetary mess was the Reichsbank itself. The term of its president, Rudolf E. A. Havenstein, was for life, and he was literally unstoppable: under Havenstein, the Reichsbank kept issuing ever greater amounts of Papiermark for keeping the Reich financially afloat. Then, on 15 November 1923, the Reichsbank was made to stop monetizing government debt and issuing new money. At the same time, it was decided to make one trillion Papermark (a number with twelve zeros: 1,000,000,000,000) equal to one Rentenmark. On 20 November 1923, Havenstein died, all of a sudden, through a heart attack. That same day, Hjalmar Schacht, who would become Reichsbank president in December, took action and stabilized the Papermark against the US dollar: the Reichsbank, and through foreign exchange market interventions, made 4.2 trillion Papermark equal to one US Dollar. And as one trillion Papermark was equal to one Rentenmark, the exchange rate was 4.2 Rentenmark for one US dollar. This was exactly the exchange rate that had prevailed between the Reichsmark and the US dollar before World War I. The “miracle of the Rentenmark” marked the end of hyperinflation.[3]

How could such a monetary disaster happen in a civilized and advanced society, leading to the total destruction of the currency? Many explanations have been put forward. It has been argued that, for instance, that reparation payments, chronic balance of payment deficits, and even the depreciation of the Papermark in the foreign exchange markets had actually caused the demise of the German currency. However, these explanations are not convincing, as the German economist Hans F. Sennholz explains: “[E]very mark was printed by Germans and issued by a central bank that was governed by Germans under a government that was purely German. It was German political parties, such as the Socialists, the Catholic Centre Party, and the Democrats, forming various coalition governments that were solely responsible for the policies they conducted. Of course, admission of responsibility for any calamity cannot be expected from any political party.”[4] Indeed, the German hyperinflation was manmade, it was the result of a deliberate political decision to increase the quantity of money de facto without any limit.

What are the lessons to be learned from the German hyperinflation? The first lesson is that even a politically independent central bank does not provide a reliable protection against the destruction of (paper) money. The Reichsbank had been made politically independent as early as 1922; actually on behalf of the allied forces, as a service rendered in return for a temporary deferment of reparation payments. Still, the Reichsbank council decided for hyperinflating the currency. Seeing that the Reich had to increasingly rely on Reichsbank credit to stay afloat, the council of the Reichsbank decided to provide unlimited amounts of money in such an “existential political crisis.” Of course, the credit appetite of the Weimar politicians turned out to be unlimited.

The second lesson is that fiat paper money won’t work. Hjalmar Schacht, in his 1953 biography, noted: “The introduction of the banknote of state paper money was only possible as the state or the central bank promised to redeem the paper money note at any one time in gold. Ensuring the possibility for redeeming in gold at any one time must be the endeavor of all issuers of paper money.”[5] Schacht’s words harbor a central economic insight: Unbacked paper money is political money and as such it is a disruptive element in a system of free markets. The representatives of the Austrian School of economics pointed this out a long time ago.

Paper money, produced “ex nihilo” and injected into the economy through bank credit, is not only chronically inflationary, it also causes malinvestment, “boom-and-bust” cycles, and brings about a situation of over-indebtedness. Once governments and banks in particular start faltering under their debt load and, as a result, the economy is in danger of contracting, the printing up of additional money appears all too easily to be a policy of choosing the lesser evil to escape the problems that have been caused by credit-produced paper money in the first place. Looking at the world today — in which many economies have been using credit-produced paper monies for decades and where debt loads are overwhelmingly high, the current challenges are in a sense quite similar to those prevailing in the Weimar Republic more than 90 years ago. Now as then, a reform of the monetary order is badly needed; and the sooner the challenge of monetary reform is taken on, the smaller will be the costs of adjustment.

 

Should We End The Fed? | Zero Hedge

November 16, 2013 9:00 am / Leave a comment

Should We End The Fed? | Zero Hedge.

With the market ebullient at the prospect of more “miracles” from Yellen, we thought it worth dusting off the following brief clip discussing what it would mean to “end the Fed.” In order to answer this question, we examine countries throughout history that did not have an established central bank. So who performs the functions of a central bank in these countries? Professor White cites private institutions, including clearing house systems, banks, and financial companies, as the main actors in the monetary systems of countries without a central bank. Ultimately, he concludes that the Federal Reserve is not necessary. Evidence shows that nations can survive without a central bank. What the Federal Reserve does well can be done even better by private institutions, and the institution is capable of serious errors.

 

 

 

The Internet Is Now Weaponized, And You Are The Target | Zero Hedge

November 16, 2013 8:58 am / Leave a comment

The Internet Is Now Weaponized, And You Are The Target | Zero Hedge.

By now, thanks to Edward Snowden, it is common knowledge and not just conspiracy theory, that every bit of information sent out into the wired or wireless ether is scanned, probed, intercepted and ultimately recorded by the NSA and subsequently all such information is and can be used against any US citizen without a court of law (because the president’s pet secret NISA “court” is anything but). Sadly, in a country in which courtesy of peak social networking, exhibitionism has become an art form, the vast majority of Americans not only could not care less about Snowden’s sacrificial revelations, but in fact are delighted the at least someone, somewhere cares about that photo of last night’s dinner. However, it turns out that far from being a passive listener and recorder, the NSA is quite an active participant in using the internet. Theweaponized internet.

Because as Wired reports, “The internet backbone — the infrastructure of networks upon which internet traffic travels — went from being a passive infrastructure for communication to an active weapon for attacks.” And the primary benefactor: the NSA – General Keith Alexander massive secret army – which has now been unleashed against enemies foreign, but mostly domestic.

Enter the QUANTUM program….

According to revelations about the QUANTUM program, the NSA can “shoot” (their words) an exploit at any target it desires as his or her traffic passes across the backbone. It appears that the NSA and GCHQ were the first to turn the internet backbone into a weapon; absent Snowdens of their own, other countries may do the same and then say, “It wasn’t us. And even if it was, you started it.”

 

If the NSA can hack Petrobras, the Russians can justify attacking Exxon/Mobil. If GCHQ can hack Belgacom to enable covert wiretaps, France can do the same to AT&T. If the Canadians target the Brazilian Ministry of Mines and Energy, the Chinese can target the U.S. Department of the Interior. We now live in a world where, if we are lucky, our attackers may be every country our traffic passes through except our own.

 

Which means the rest of us — and especially any company or individual whose operations are economically or politically significant — are now targets. All cleartext traffic is not just information being sent from sender to receiver, but is a possible attack vector.

… which is basically packet injection:

The QUANTUM codename is deliciously apt for a technique known as “packet injection,” which spoofs or forges packets to intercept them. The NSA’s wiretaps don’t even need to be silent; they just need to send a message that arrives at the target first. It works by examining requests and injecting a forged reply that appears to come from the real recipient so the victim acts on it.

 

The technology itself is actually pretty basic. And the same techniques that work on on a Wi-Fi network can work on a backbone wiretap. I personally coded up a packet-injector from scratch in a matter of hours five years ago, and it’s long been a staple of DefCon pranks.

Traditionally, packet injections has been used mostly for censorship purposes:

The most infamous use of packet injection prior to the Snowden leaks was censorship, where both internet service providers (ISPs) and the Great Firewall of China injected TCP reset packets (RST) to block undesired traffic. When a computer receives one of these injected RST packets, it closes the connection, believing that all communication is complete.

 

Although public disclosure forced ISPs to stop this behavior, China continues to censor with injected resets. It also injects the Domain Name System (DNS) — the system all computers use to turn names such as “www.facebook.com” into IP addresses — by inserting a fake reply whenever it sees a forbidden name. (It’s a process that has caused collateral damage by censoring non-Chinese internet traffic).

And user identification, especially in making Tor obsolete. That’s right: all users of Tor believing they hide behind the veil of anonymity – you aren’t.

User cookies, those inserted by both advertising networks and services, also serve as great identifiers for NSA targeting. Yet a web browser only reveals these cookies when communicating with such sites. A solution lies in the NSA’s QUANTUMCOOKIE attack, which they’ve utilized to de-anonymize Tor users.

 

A packet injector can reveal these cookies by replying to an unnoticed web fetch (such as a small image) with a HTTP 302 redirect pointing to the target site (such as Hotmail). The browser now thinks “hey, should really go visit Hotmail and ask it for this image”. In connecting to Hotmail, it reveals all non-secure cookies to the wiretap. This both identifies the user to the wiretap, and also allows the wiretap to use these cookies.

 

So for any webmail service that doesn’t require HTTPS encryption, QUANTUMCOOKIE also allows the wiretap to log in as the target and read the target’s mail. QUANTUMCOOKIE could also tag users, as the same redirection that extracts a cookie could also set or modify a cookie, enabling the NSA to actively track users of interest as they move across the network — although there is no indication yet that the NSA utilizes this technique.

But all of the above are largely passive interception and surveillance strategies. Where it gets interesting is when the NSA’s mission is…

User Attack

 

The NSA has a collection of FOXACID servers, designed to exploit visitors. Conceptually similar to Metasploit’s WebServer browser autopwn mode, these FOXACID servers probe any visiting browser for weaknesses to exploit.

 

All it takes is a single request from a victim passing a wiretap for exploitation to occur. Once the QUANTUM wiretap identifies the victim, it simply packet injects a 302 redirect to a FOXACID server. Now the victim’s browser starts talking to the FOXACID server, which quickly takes over the victim’s computer. The NSA calls this QUANTUMINSERT.

 

The NSA and GCHQ used this technique not only to target Tor users who read Inspire (reported to be an Al-Qaeda propaganda magazine in the English language) but also to gain a foothold within the Belgium telecommunication firm Belgacom, as a prelude to wiretapping Belgium phones.

 

One particular trick involved identifying the LinkedIn or Slashdot account of an intended target. Then when the QUANTUM system observed individuals visiting LinkedIn or Slashdot, it would examine the HTML returned to identify the user before shooting an exploit at the victim. Any page that identifies the users over HTTP would work equally well, as long as the NSA is willing to write a parser to extract user information from the contents of the page.

 

Other possible QUANTUM use cases include the following. These are speculative, as we have no evidence that the NSA, GCHQ, or others are utilizing these opportunities. Yet to security experts they are obvious extensions of the logic above.

 

HTTP cache poisoning. Web browsers often cache critical scripts, such as the ubiquitous Google Analytics script ‘ga.js’. The packet injector can see a request for one of these scripts and instead respond with a malicious version, which will now run on numerous web pages. Since such scripts rarely change, the victim will continue to use the attacker’s script until either the server changes the original script or the browser clears its cache.

 

Zero-Exploit Exploitation. The FinFly “remote monitoring” hacking tool sold to governments includes exploit-free exploitation, where it modifies software downloads and updates to contain a copy of the FinFisher Spyware. Although Gamma International’s tool operates as a full man-in-the-middle, packet injection can reproduce the effect. The injector simply waits for the victim to attempt a file download, and replies with a 302 redirect to a new server. This new server fetches the original file, modifies it, and passes it on to the victim. When the victim runs the executable, they are now exploited — without the need for any actual exploits.

 

Mobile Phone Applications. Numerous Android and iOS applications fetch data through simple HTTP. In particular, the “Vulna” Android advertisement library was an easy target,  simply waiting for a request from the library and responding with an attack that can effectively completely control the victim’s phone. Although Google removed applications using this particular library, other advertisement libraries and applications can present similar vulnerabilities.

 

DNS-Derived Man-in-the-Middle. Some attacks, such as intercepting HTTPS traffic with a forged certificate, require a full man in the middle rather than a simple eavesdropper. Since every communication starts with a DNS request, and it is only a rare DNS resolver that cryptographically validates the reply with DNSSEC, a packet injector can simply see the DNS request and inject its own reply. This represents a capability upgrade, turning a man-on-the-side into a man-in-the-middle.

 

One possible use is to intercept HTTPS connections if the attacker has a certificate that the victim will accept, by simply redirecting the victim to the attacker’s server. Now the attacker’s server can complete the HTTPS connection. Another potential use involves intercepting and modifying email. The attacker simply packet-injects replies for the MX (Mailserver) entries corresponding to the target’s email. Now the target’s email will first pass through the attacker’s email server. This server could do more than just read the target’s incoming mail, it could also modify it to contain exploits.

 

Amplifying Reach. Large countries don’t need to worry about seeing an individual victim: odds are that a victim’s traffic will pass one wiretap in a short period of time. But smaller countries that wish to utilize the QUANTUMINSERT technique need to force victims traffic past their wiretaps. It’s simply a matter of buying the traffic: Simply ensure that local companies (such as the national airline) both advertise heavily and utilize in-country servers for hosting their ads. Then when a desired target views the advertisement, use packet injection to redirect them to the exploit server; just observe which IP a potential victim arrived from before deciding whether to attack. It’s like a watering hole attack where the attacker doesn’t need to corrupt the watering hole.

Can anything be done to prevent the NSA’s internet army from running over a world that spends the bulk of its time in its reaches? Not much:

The only self defense from all of the above is universal encryption. Universal encryption is difficult and expensive, but unfortunately necessary. Encryption doesn’t just keep our traffic safe from eavesdroppers, it protects us from attack. DNSSEC validation protects DNS from tampering, while SSL armors both email and web traffic.

 

There are many engineering and logistic difficulties involved in encrypting all traffic on the internet, but its one we must overcome if we are to defend ourselves from the entities that have weaponized the backbone.

Alas, in the battle against the NSA, the biggest enemy is not the authoritarian state’s Super Big Brother, but apathy itself. It is that war that is by far the most important one, and which America has already lost.

Average:Select ratingPoorOkayGoodGreatAwesome

Your rating: None Average: 5 (29 votes)

Subscriptions (0)

– advertisements –

 

 

%d bloggers like this: