Here is why….

• The country is pretty much socialistic in spite of the mass privatization wave recently.

• One of the main drivers of government revenue, tax on agriculture is going to get hurt very badly with the reduction in grain prices.

• The last default is hanging over their heads, so getting financing for the government is pretty much impossible.

• The government has been spending some of its accumulated reserves defending the currency so far.

All these added up show signs that something will have to happen over the medium term.  In the short, you can see the action to try to take over pension funds as a sign the government is getting desperate for funds.  If this does not work, when revenue from agriculture taxes do not come in, the government will have no choice but to default.  I hate this happens, but if you spend more than you make, eventually you will have to face up to the consequences.

The wildcard for me right now is Venezuela…they are closely aligned, but my guess is will falling oil prices, Venezuela has its own problems, and will have to let its friend fight for itself.

Also, will the IMF step in.  Many South American countries are not the happiest with the IMF, Argentina in particular after the privatization wave, but if they do not come in to help, I have no idea what will happen.

There has already been depreciation in the currency vs the dollar, although not as bad a Brazil, which leads me to think without government support, it would be much worse.  Once the government is not able to support the currency, get ready for a quick and far fall!!!

All that being said, who is doing even better is the Yen.  For years, the government has been keeping it artificially low, which reduces consumption and helps increase production (imports cost more exports are cheaper).  It is almost as if the company has been saving in some roundabout way.  If the government lets the Yen keep appreciating, it will be interesting to see how strong it gets.  Once that happens, there could be some major purchases coming for foreign companies.

Additionally, I keep wondering where China is in all of this.  The Yuan has been pretty steady for a while, after appreciating after the government let it float (somewhat float).  We hear so much about the dollar reserves and the government messing around in the markets…I wonder if they truely let it float, what it would do.  My guess is appreciate like crazy.  Even if they don’t let it appreciate vs the dollar, we are bound to see it stay the same.

All this being said, if you can figure out how to play it you could make a lot of money.  For me, I am looking for cash heavy businesses, trading at low valuations, which will not be majorly impacts if the world economy gets hurt.  This may seem like difficult criteria, but from what I see Chinese online gaming stocks fit this.

Let me explain in a little more detail…the idea of health insurance is to protect you from the high cost of low occurrence activities, sure as a coma, or life threatening disease.  But, because typical insurance has low deductibles, many people use it to pay for normal doctor visits, or prescription drugs that they do not necessarily need (fun debate to have with people who use them).  It also removes the cost of not taking care of ones self, which commonly leads to diabetes, which is extremely expensive.  Before I get too far off subject, all of these little cost, and lack of effort of people to stay in shape has lead to more use of the medical system, which has increased cost.  Because people are pooled together, they do not pay cost directly, so there is little individual incentive to take corrective action.

To fix this, the government has allowed for Health Savings accounts.  If a person wants to take responsibility for their health, is willing to pay for the low cost doctor visits or prescription drugs, and wants coverage for the high cost low occurrence accidents this is perfect.  How it works is you and your employer pay your respective portions for health insurance…but unlike typical insurance, not all of it goes to premiums.  Because of the High Deductible insurance, premiums are less (this is because it does not pay for many of the low dollar items which make up a large portion of typical insurance claims).  The savings from the low premiums is then deposited into a Health Savings Account, which can be used to pay for the low dollar items.  Any dollars left over roll from year to year, and can be used for anything although a penalty is levied if not used for health cost.

This situation produces a very favorable outcome, people take responsibility for their health, use less of the low cost items which add up to be a majority of health cost, and are insured for any high cost health issue.  Wow, people will be healthier and the cost will go down.  It is amazing what happens when people are given responsibility for their actions.

We are what we are, humans act how they act, right or wrong, there is no reason to be idealistic and think people will change.  We are selfish and do what is best for us.

I am not sure if this has changed over the years, but it seems like more lending is going to consumers and more deposits are coming from businesses.  This can be seen in the large amount of mortgages out there and the relative stregnth in corporate balance sheets.   If anyone has particular information, let me know.

If you watch the news you will probably come up with the same idea, but if you take a step back, really how bad is it.  Go to the mall or a fancy resteraunt and surprise they still have people making purchases.  If you are looking for a home to purchase, you can still get a loan, with a relatively low rate.  It just doesn’t make sense to me, but we will see.  Watch Q3, if it comes in okay and the forecast isn’t too bad, we will see some big jumps.

In short, the price of stock options boils down to implied volatility, which is more or less the probabilities of wide variations in the underlying stocks price.  Using Black-Scholes which is more or less the space under the normal distribution curve that shows the probability at different prices for the underlying stock.  Less volital, the taller, thinner the curve is.  As volitility increases the wider the curve is.  So, as you get an option away from the current stock price, the area under the curve is larger when the volatility is higher.

If you are not familiar with this, I doubt my short explaination will help much, but it should plant some seeds which will make more sense as you research.

This is no different from the banking bailout now.  If the government takes responsibility for what others have done, those who made the mistakes will do it again.  Many times this is called moral hazard.  If I know someone will catch me if I fall, I will take risk which I normally would not take.  Although it is nice be caught when you fall, is comes at a cost, and inflicting that cost on those who are not willing is a violation of their rights.  There may be some trickle down, but it will not be as bad as if there is a bailout and risky actions are still taken, and we find ourselves in the same situation in the future.

I recently read a quote form a congressman that when he started Chrisler was going into bankruptcy, and the worry was that they could go bankrupt, and they needed to be saved.  Here we are again, and issue.  If they would have fallen the first time, there would have been room for a better company to step up, and we would have been better off.  Instead, they were bailed out and squeezed out new competition, only to mess it up again.

All the argument should be is does the calapse of the financial industry violate anyone’s rights.  The clear answer is no, but forcing people to pay for a bailout is clearly a violation of individual rights.  All of the arguments about the trickle down and the positive possibility of the assets being worth more than they are bought for are wrong, and just a short fix.  Kind of like when you get a wish from the geniue in the bottle, you make your wise, get it, but the unexpected side effects are worse than what you have gotten.

Don’t bail out the financial industry.  It may hurt for a little while, but we will make it through it and will be stronger after.

So, not to get too deep in social theory and what is best, economically there is an impact.  People will work harder in a pull system because the harder they work the more resources they can control.  These resources could be directed towards a new car, bigger house, cure AIDS, help the poor, or any other activity.  Over time, the effect of this additional work can become very large.  If you look to the basics, “The Wealth of Nations” one of the main aspects that makes a nation wealthy is private property.  When you have private property, you can accumulate resources, and control them, which makes you work harder, which in turn generates wealth for the nation.  Additionally, we are more likely to invent or innovate.  If I know I can become very wealthy if I work hard and think of the next great invention, I will work harder to do so.  Maybe I will stay up later than normal, sacrifice sleep, sacrifice parting, etc.  If it would not see the benefit of my work, I would be more inclined to relax, enjoy life, and live for today.  Resulting in the invention never materializing.

In my opinion this result of choosing an economy is just as large as the “fairness” in allocating resources.  It is an investment in the future, which will pay large dividends and benefit society as a whole.

The basic way to control the currency is by requiring all exchanges to be done by the government (CADIVI).  You can imagine how slow this must be…all businesses needing to send funds overseas much go through a government organization.  6 months waiting on cash, the supplier will not be too happy about that.  Less quantity supplied, higher prices, Venezuelan people hurt (#1 loser).  That is why yearly inflation is around 30%, they are also spending the oil money like crazy.

Also, the government must convert the Bolivars to Dollars to pay the suppliers.  They convert at the official rate 2.15, when they could you the unofficial 4, 1.85 in loses on each dollar traded (#2 loser).  Of course Venezuela produces Bolivars, so the impact is not really direct.  Additionally, citizens have learned how to get a piece of the pie, they travel, and max out their credit cards to get cash back…in casinos, or special shops set-up for this.  They then come back and convert the funds to Bolivars at the unofficial rate, and pay off their credit cards which convert Dollars to Bolivars at the official rate.  Easy way to make a few thousand dollars.  To limit this, the government restricts the amount people can spend on their credit cards overseas to 5 KUSD per year (#1 winner).  If they want to spend more than 5 KUSD, they must convert their Bolivars to Dollars at the unofficial rate (#4 loser).

The big winners of this are those who have access to convert Bolivars to Dollars at the official rate, then convert the Dollars to Bolivars at the unofficial rate.  There seem to be some banks who can do this, mainly because of close contact to government officials (#2 winner).  I am searching for a way to do this, if I find it, I will write a book about it while in the Bahamas so you can learn it too.

To sum, the government has fixed the exchange rate, which creates more bureaucracy, a tougher business environment, make a few people extremly wealthy, and screws the every day Venezuelans.  So much oil, and the government has found a way to keep the people poor.  My advise, open the market, put reasonable taxes on oil.  Cut all other taxes to 0.  Reduce government, and watch the growth.

Before I begin, let me lay a little basic foundation.  The goal of the economy is to allocate scarce resources.  This is a very big statement.  First, to allocate, what is made and also how is it divided.  Second, scarce resources, everyone can not have everything, we have a limited amount of resourses to work with.

That being said, and to get to the title Push vs Pull Economy, these are the two ways to allocate the scarce resources.  First, I will discuss push.  This method is done at the top level.  If it is determined to build more power plants, resources are put towards that.  If we need more engineers, more engineers are made.  If people is a certain city need more gas, more gas is directed towards them.  This is most commonly done through taxes.  Taxes representing a pooling of resources, which is later disbursed by the government in the best way.  So, when the government says we need more wind power, that is what is happening, tax money is being taken, and put towards wind power.  Of course, it is not this simple, the government can use regulation, tax rates, or other incentives to direct resources, but none the less, resources are directed by the government.

The other system, Pull, uses a market to determine where to focus resources.  Although trying to map out and control the market is for the most part impossible, the idea is very simple.  The working of supply and demand determines a price, which results in additional or less resources being dedicated.  It also factors in the scarcity of the resource.  So, if the people want more oil, they will increase demand, which will raise the price, which results in more drilling, and more supply (i.e. allocate more resources to the production of oil).  Keeping the same examples as above, if people want more wind energy, they will demand, it, which will raise the price paid, which results in more wind projects, again, dedicate more resources to building wind energy.  And the last example, number of engineers.  If people want more engineers want more engineers, the pay rate for engineers will increase, which will result in more people becoming engineers, again, more resources being dedicated toward engineering.

Following these examples, it is just like manufacturing.  In Push, a person or group of people determine what to produce, and it is made.  Of course this is related to business demand, but after being analyzed by this person or group of people.  Pull on the other hand results in items being built only when the demand is know from the customer, ie order is made.  The results of the two can be drasic, Push can result in great waste, producing too much of products not wanted, and more damaging, not being able to produce what customers want because resources were dedicated to other those not wanted.  Pull on the other hand is very efficient, what is demanded is produced, nothing more, nothing less.  Of course, I have simplified this, but the idea is there.

When the government determines what is produced, we will end up with more of what we do not want, and less of what we really want.  If we let the market take over, we will get, by definition, exactly what we want.