Wedding in the air

This Saturday I am going to marry the love of my life, Joy. I am too busy for a serious post, but I shall return next week with some inquiry into an intellectual topic.

Tweeting trouble

New forms of web sites are arising on the internet daily. One popular site is Twitter, a site where users "Tweet" short messages 140 characters or less. It is microblogging or blogging simple statements. I am assuming a large portion of this blog's readers are avid users. Yahoo! reports that a 17 year old Australian teenager caused a storm on Twitter recently with a short, malicious Javascript code that was spread using Tweets.

Pearce Delphin, whose Twitter name is @zzap, admitted exposing a security flaw which was then pounced upon by hackers, affecting thousands of users and causing havoc on the microblogging site for about five hours.

Delphin, who lives with his parents in Melbourne, said he tweeted a piece of "mouseover" JavaScript code which brings up a pop-up window when the user hovers their cursor over the message.

As is often found with computers, cutting edge things are performed by students messing around with simple computer code. I had a lot of computer scientist major friends in college that did similar things. This is an example where education enriches a person's life, but demonstrates that creativity is within. The young man was only in high school.

What is interesting about the incident is the extent which the code caused Twitter interruptions world wide. Once the genie escaped from the bottle, it was not returning. It eventually came back to haunt the code's creator.

Twitter apologised to its millions of users after the "mouseover bug" raged through the site, opening pop-up windows in Web browsers and automatically generating tweets from other accounts.

White House press secretary Robert Gibbs and Sarah Brown, wife of Britain's former prime minister Gordon Brown, were among those hit by the bug before engineers patched it up.

The "Netcraft" security website traced the malicious code back to Delphin, who said he got the idea from another user who employed a similar code to make his profile and tweets rainbow-coloured.

"After that, it seems like some of my followers realised the power of this vulnerability, and within a matter of minutes scripts had taken over my timeline," Delphin said.

It appears that the code was not used for malicious intent when hackers got a hold of the script. What is appropriate though is hackers used the script for one of the internet's biggest money generators, porn.

But the idea was soon taken up by hackers who tweaked the code to redirect users to pornographic sites and create "worm" tweets that replicated every time they were read.

I think too often these kind of accidental discoveries are not utilized enough in our society. People have to have proper education and proper titles to have their ideas or products spread. This incident is proof creative tinkering requires no titles and limited education.

Cause of Great Recession?

This post is the second of a series covering an event that is going to strike the world economy over the next year or so. Inflation and deflation was the first posting in this series giving a definition of several economic terms for readers. Now, I am going to discuss what is the root cause of our current economic issues often referred to as the Great Recession. The link gives the Wikipedia explanation to our protracted downturn, but, I would not put too much faith in the details. The basic reason why our economy is having problems comes from excessive amounts of debt.

Debt is the result of credit. It is the lifeblood of an economy. Businesses are able to open and expand quickly with access to capital through credit. Consumers can purchase big ticket items such as homes or cars. These two examples would take years for most people to save enough money to execute these tasks without credit. In most cases, it would never be done. Credit expansion is good as long as it is limited to the point debtors can pay back their creditors. It becomes a problem when the debts are NOT paid back. We all know of the family who buys an enormous house, several vehicles and other items they can not afford. We never talk about the creditors taking back possessions.

Reading over several sources, the accumulated private and public debt of the USA is on the order of $54 to $59 trillion. Yes, that is a "t". In comparison, the gross domestic product (annual economic output) of the US is on the order of $14.5 trillion. We may ask, in what forms are the debt? I do not have an exact breakdown, but the main sources are:

• Federal, state and local government
• Housing
• Automobile
• Corporations
• Student loans
• Credit card.

This list is not exhaustive, but covers the biggest categories. Most are familiar with mortgages, auto loans, student loans and credit cards. The debt not familiar to most people are bonds. BondsIOUs issued by either governments or corporations to borrow money.

The government accumulation of debt is obvious. Taxes were cut over the last couple of decades as no one wants to pay while politicians refused to cut spending. Governments issued massive amounts of bonds to keep the social spending going. Debt was accumulated to keep people happy. The amount of debt issued by governments before 2007 was not that significant though. It does contribute to the overall problem now as the amount grows quickly. We will discuss this in the next installment why.

Large amounts of private debt is much more a problem. If everyone (businesses included) spend a significant amount of their earnings on repaying debt, there is not much left over to purchase new items or the demand within an economy decreases. In effect, the money was already spent on items consumer already own or past events. It becomes an even bigger issue if consumers can not keep up payments and default on the debt. This would limit the ability of an economy to grow. The US economy is based upon ~70 % consumer spending by the simple fact that we are not longer a major manufacturer. If consumer spending decreases, the economy contracts and the result is a recession. During normal economic cycles, this occurs every ~8.5 years or so which can be expected. Normal recessions last 6 to 9 months typically with a turn around caused by credit/economic growth.

The Great Recession is different. The number of jobs have not returned with the official unemployment rate U3 at ~9.6 % and true unemployment U6 is at 16.5 %. In a nut shell, U6 is all of the people who want to work but cannot find full time employment. 1 in 6 currently fit into this category folks! This is not your daddy's recession. It all comes back to excessive amounts of debt.

How did we accumulate this amount of debt? It has to due with a new financial innovation that began to appear in the '90s known as securitization. I will simplify this complex phenomenon for laymen. Securitization is the process in which banks take loans on their balance sheets and place them into new structured securities. These new securities are then sold to other investors who make money off of the payments from within the investment vehicles. Banks then remove the loans and risk from their balance sheets. The risk is passed onto the investors within the securities. The result is banks passed on loan default risk to others while in the past banks held onto the loan portfolio (risk). Final results of these new instruments were a credit explosion since the banks had greater incentives to make risky loans. Too much debt was then accumulated over a small time frame outpacing the economic realities underlying the loans.

Next post we will talk about where this is going to lead us.

Inflation and deflation

One of my side interests is in economics. I am not formally trained in this field, but due to my engineering mathematical background, understanding the concepts are simple. There are many schools of thought on economics including the Chicago, Keynesian, and Neoclassical. I tend to lean towards the Austrian school of thought. This post provides background to a key topic among those interested in this field, specifically what is inflation and deflation. This post will later be followed up with a hotly debated topic, will the US face inflation or deflation over the next few years.

First, we are going to define what is the basis of economics, currency (money) and credit. Currency is a barter exchange medium within a state. It allows individuals to purchase items without the requirement of a specific barter item a retailer may desire. It is much easier to fill a cash register than to have stores of bulky commodities like grain for each transaction. Modern fiat money has not intrinsic value except what is backed by the government of issue. Fiat money in circulation is measured in many ways as M0, M1, and M2. Since M0 is the representation of physical, printed currency and is a small percentage of money available, the majority of existing money is nothing more than 1s and 0s on a bank's computer.

Credit is a loan from a banking entity (creditor) to a debtor. It is an IOU that is paid back to the creditor plus interest over a specified period of time. Credit behaves in a similar manner within the economy as actual money.

The amount of effective money (EM) flowing within an economy depends on the monetary base (MC) in circulation and credit (CR):
EM = MC + CR.

Second, in modern economies central banks (CB) control the EM through many means. The central bank for the USA is known as the Federal Reserve. They can create money out of thin air or withdraw money from the system. It is fiat money so they do not have to back it with solid assets, just the promise of the backing government. The most common means for CBs to manipulate the EM is through monetary creation (printing money) and interest rates. Interest rate increases discourages credit and decreasing interest rates increases credit availability. One other factor to note is it has been demonstrated that often commercial banks lend to customers before CBs create money. The CBs will increase the amount of currency accordingly later.

Third, I am going to define inflation and deflation. Most people have experience with inflation. We all hear stories of our parents buying nickel cokes and gas a quarter per gallon. Inflation has increased the value of these items. You dollar buys less, thus, inflation means the currency is losing relative value. The exact opposite is deflation with the currency gaining relative value. There are many causes of inflation and deflation. The issue I am going to tackle here has to do with effective money moving through the economy. If the supply of EM increases significantly, it has less value and inflation is the result. If EM contracts significantly, deflation occurs.

This has been an introduction to inflation/deflation. As early stated, the next post will cover the predicament the US will face over the next few years.

Burning sports car

The old adage goes, "You often get what you pay for." In some cases, this is not true. This post covers a slight design flaw found in a very high end Ferarri 458 Italia supercar. In the CNN/Money website article, it details how the house priced car ($230,000) suddenly bursts into flames without warning.

"In rare instances the heat shield could become deformed, bringing it too close to the exhaust system and igniting," a Ferrari spokesperson said.

Ferrari is recalling all its 458 Italia vehicles after five fires were reported in California, Switzerland, China and France.

I find this interesting. If you pay a mint for this little car, the design flaws of this sort should be worked out by delivery. What are you paying for? One brief, expensive fireworks show? Specifications on this car are obscene,

It has a 4.5-liter 8-cylinder engine, 7-speed automatic transmission, 570 horsepower and has a base price around $230,000.

Most of us rarely see such a piece of engineering on the road unless visiting the ritzy part of town. My advice is not to worry about this incindiary vehicle visiting a road near you,

The NHTSA statement said 303 vehicles are being recalled, and owners could be eligible for reimbursement for if they spent money on repairs related to the problem before the recall was announced.

If you are going to build it, build it right. Reputation is precious.