Tue. Oct 26th, 2021

In previous articles we have learned about the importance of monetary and fiscal policy decisions and how they can generate fruitful or unfruitful environments for economic performance. Today, following in the footsteps of market assistant Ray Dalio, we’ll explore a simple way that retailers can use to calculate their own “economic success” formula.

Think about principles

Ray Dalio is about Principles … and in fact his latest book is called exactly that. In a previous article we briefly pointed out that governments and central banks cannot produce wealth directly, but could influence the production of wealth by helping their population increase. productive.

So how can we measure exactly how much the political leaders of a given country help their people? Based on the work of Ray Dalio, the main areas of intervention are:

  • Self-sufficiency: the logic is that being self-sufficient fosters productivity by connecting the ability to spend with the need to produce. These are responsibilities and possibilities for personal growth. If governments help their people to become independent, instead of depending on others, it gives them respect for themselves. Once all basic needs are met, it seems that a greater degree of self-sufficiency is productive and generates higher levels of happiness.

The engines of self-sufficiency most correlated with future growth, based on Dalio’s work, are:

  • Average hours worked per week
  • Home care benefits
  • Government spending
  • Competitiveness: the logic is that countries with higher productivity up to income levels are more competitive. On the other hand, countries that finance their growth (through debt) are destined to have lower growth in the future. Therefore, it is not enough to measure only the contributions (expenditure on education, raw materials, etc.). To get a sensible measure, countries need to evaluate the efficiency of their capital allocation: how much does this level of productivity cost us?

The engines of competitiveness that correlate most with future growth, based on Dalio’s work, are:

  • Labor force participation rate / per capita income
  • Average weekly hours worked / income per capita
  • Per capita household savings / income
  • Fixed investments / per capita household income
  • Levels of corruption
  • Indebtedness: the logic is that countries with low debt levels and low interest rates on debt, along with easy monetary policy, have more arsenal, so to speak. Governments and private citizens have more room to use debt to improve production and spending, thus accelerating economic growth. But debt creation cannot last forever and countries with high debt levels and low money are likely to grow less.

The engines of debt most related to future growth, based on the work of Dalio, are:

  • Public debt
  • Debt service relationship
  • Yield slope curve
  • Nominal GDP growth rate / 10-year nominal yield
  • Central Bank balance sheet

Connecting the dots

Some readers with computer security are likely to want to get their hands dirty and work with the data for themselves, and I recommend it. But for the typical retailer, efficiency is the name of the game, so here are some ready-made sources for a bird’s eye view of the game. current situation (the trend is more important, but later).

First, a look at competitiveness.

Source: http://reports.weforum.org/global-competitiveness-index-2017-2018/competitiveness-rankings/

Then take a look at perceptions of corruption:

Source: https://www.transparency.org/news/feature/corruption_perceptions_index_2016#table

And after assessing competitiveness, we move on to debt:

Source: https://en.wikipedia.org/wiki/List_of_countries_by_public_debt

And now to the conditions of monetary policy: we need to compare GDP growth rates with current interest rate levels.

  • If political rates> GDP growth rates, the monetary policy environment is reduced
  • If growth rates

Source: https://en.wikipedia.org/wiki/List_of_countries_by_real_GDP_growth_rate

Source: http://www.global-rates.com/interest-rates/central-banks/central-banks.aspx

And now let’s move on to the Central Bank’s balance sheets: do central banks have ads or not?

Current situation and possible future path

Looking at these graphs, you should be able to see how potentially we are facing a future decline of current leaders (US, UK and Europe) in favor of some emerging Asian economies (especially Singapore, Hong Kong), while in other countries New Zealand and India seem to have equally bright future and present prospects.

Debt levels (and therefore debt interest rates) and central bank balance sheets are clear culprits that will affect the future growth of most developed countries. But this is not all. The psychology of more developed nations would indicate imminent deleveraging (to use Dalio’s definition): people in these countries earn and spend a lot, and if we consider labor productivity, it is expensive. However, since previous generations have struggled for these easy living conditions, people are often reluctant to limit their spending according to their reduced income.

The big picture is that economic and efficient economies have working people working for the quality of life we ​​currently experience in the developed world. They are working hard to get there. But at the same time, depending on political decisions (mainly the amount of debt used, the amount of corruption that exists, and the government’s influence on productivity through competitiveness), developed countries enter a stage of saturation.

More to you

By using essential principles before we get lost in data and details, we have seen how it is still possible to get a realistic picture of what the future may hold, if current trends continue. What we are seeing, at the macro level, is exactly the same dynamic that happens every 8-9 years through the credit cycle: it seems that civilizations are growing, gradually taking advantage, reaching a plateau and requiring strong deleveraging.

This has definitely happened several times throughout history, as the world’s financial capital has shifted and is set to return to Asia in the future. How far into the future is uncertain, but the data speaks for itself: developed nations have too much debt and central banks have too many assets on the balance sheet. The quality of life is very high and income cannot be maintained. It’s an expensive population, so to speak.

What Asia lacks, according to our analyzes, is competitiveness in the form of less corruption and bureaucracy. They have the advantage in other sectors. We’ll see what the future holds …

About the author

Justin is a forex trader and coach. He co-owns www.fxrenew.com, a Friday signal provider of banks and hedge fund traders (get a free trial), or get FREE access toT the advanced currency exchange course for smart traders. If you like writing it, you can subscribe to the newsletter for free.



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