4 October 2018   Leave a comment

The International Monetary Fund (IMF) has conducted a review of global economic policies since the turmoil of the Great Recession in 2008-09. Generally speaking, global economic growth has been tepid since that time, an outcome that was not unexpected since the crisis was spawned by very high rates of debt that choked off money that could have gone into productive investments.  The IMF notes that there have been some important policy changes implemented in order to prevent a similar explosive growth of debt, but that these changes do not seem to have been entirely effective.  As The Guardian notes:

“The sequence of aftershocks and policy responses that followed the Lehman bankruptcy has led to a world economy in which the median general government debt-GDP ratio stands at 52%, up from 36% before the crisis; central bank balance sheets, particularly in advanced economies, are several multiples of the size they were before the crisis; and emerging market and developing economies now account for 60% of global GDP in purchasing-power-parity terms – which compares with 44% in the decade before the crisis – reflecting, in part, a weak recovery in advanced economies.”

The article goes on to link the growth in income inequality since 2008-09 as problematic since it may lead to a crisis of underconsumption, where there is insufficient demand in the economy to sustain economic growth: “Like many institutions the IMF has warned that rising levels of inequality have a negative impact on investment and productivity as wealthier groups hoard funds rather than re-invest them in productive parts of the economy. Without a rise in investment economies remain vulnerable to financial stress.”

Bloomberg has published an article that can only be described as devastating to the idea of fully globalized supply chains that underpin the global economy.  As the world has moved into digitized modes of production, there are very few modern products that are fully assembled in a single place.  Instead, most products are filled with components that are produced by the most efficient producers and then assembled in a final stage.  This approach to production creates extraordinary efficiencies that minimize costs and enhance value.  But the complicated networks of the different components require unbelievable coordination.  The networks also create opportunities for sabotage and surveillance that many thought were unthinkable because the advantages from such subterfuge would call into question the viability of the whole idea of globalization.

Apparently, the Chinese military decided that the risks were worthwhile.  It tried to subvert the supply chain by infiltrating the makers of microchips (through bribery and intimidation) with its own chips that would give it access to the hardware of any computer using the corrupted chips.  According to Bloomberg the gambit was discovered by Amazon Web Services which was checking on the reliability of servers made by a company named Elemental it was going to use for its cloud services:

“[Amazon] hired a third-party company to scrutinize Elemental’s security, according to one person familiar with the process. The first pass uncovered troubling issues, prompting Amazon Web Services to take a closer look at Elemental’s main product: the expensive servers that customers installed in their networks to handle the video compression. These servers were assembled for Elemental by Super Micro Computer Inc., a San Jose-based company (commonly known as Supermicro) that’s also one of the world’s biggest suppliers of server motherboards, the fiberglass-mounted clusters of chips and capacitors that act as the neurons of data centers large and small. In late spring of 2015, Elemental’s staff boxed up several servers and sent them to Ontario, Canada, for the third-party security company to test, the person says.

“Nested on the servers’ motherboards, the testers found a tiny microchip, not much bigger than a grain of rice, that wasn’t part of the boards’ original design. Amazon reported the discovery to U.S. authorities, sending a shudder through the intelligence community. Elemental’s servers could be found in Department of Defense data centers, the CIA’s drone operations, and the onboard networks of Navy warships. And Elemental was just one of hundreds of Supermicro customers.

“During the ensuing top-secret probe, which remains open more than three years later, investigators determined that the chips allowed the attackers to create a stealth doorway into any network that included the altered machines. Multiple people familiar with the matter say investigators found that the chips had been inserted at factories run by manufacturing subcontractors in China.

“This attack was something graver than the software-based incidents the world has grown accustomed to seeing. Hardware hacks are more difficult to pull off and potentially more devastating, promising the kind of long-term, stealth access that spy agencies are willing to invest millions of dollars and many years to get.”

All the companies involved have vigorously denied that the hacks occurred or were successful, but one could hardly expect them to admit such egregious security lapses.  Indeed, I suspect that this story will not receive much attention because of a fear of panic.  But it is instructive to note that the stock of Super Micro Computer fell by -41.12% today.  Warfare in the 21st century takes forms that Napoleon would find hard to comprehend. 

Posted October 4, 2018 by vferraro1971 in World Politics

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