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 the market wizard Ray Dalio, we shall explore a simple way that retail traders can use to compute their own “economic success” formula.

Think in Principles

Ray Dalio is all about Principles…and in fact his most recent book is called exactly that. In a previous article we briefly noted that governments and central banks cannot produce wealth directly, but instead they could influence wealth production by helping their population become more productive.

So how can we measure exactly how much policymakers in any given country are helping their people? Based on Ray Dalio’s work, the main areas of intervention are:

  • Self-Sufficiency: the logic is that being self-sufficient encourages productivity by connecting the ability to spend with the need to produce. It’s about responsibility and personal growth possibilities. If governments help their people become independent, rather than dependent on others, it gives people self-respect. Once all basic necessities are covered, a higher degree of self-reliance would seem to be both productive and generate higher levels of happiness.

The drivers of Self-Sufficiency which are most correlated to future growth – based on Dalio’s work – are:

  • Average Weekly Hours Worked
  • Welfare Benefits to Households
  • Government Spending
  • Competitiveness: the logic is that countries with higher productivity 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. So it’s not enough to measure only the inputs (spending on education, raw materials, etc). In order to obtain a sensible measure, countries need to evaluate the efficiency of their capital allocation: how much is this productivity level costing us?

The drivers of Competitiveness which are most correlated to future growth – based on Dalio’s work – are:

  • Labour Force Participation Rate/Income per Capita 
  • Average Weekly Hours Worked/Income per Capita
  • Household Savings/Income per Capita
  • Household Fixed Investments/Income per Capita
  • Corruption Levels


  • Indebtedness: the logic is that countries with low debt levels and low interest on debt, along with easy monetary policy, have more arsenal – so to speak. Governments and private citizens have more space to utilize debt to enhance production and spending – thus accelerating economic growth. But debt creation cannot last forever and countries with high debt levels and tight money are likely to grow the least.

The drivers of Indebtedness which are most correlated to future growth – based on Dalio’s work – are:

  • Government debt
  • Debt Service Ratio
  • Steepness of Yield Curve
  • Nominal GDP Growth Rate/Nominal 10Yr Yield
  • Central Bank Balance sheet

Connecting the Dots

Some computer-savy readers will probably want to get their hands dirty and work with the data themselves – and I encourage that. But for the typical retail trader, efficiency is the name of the game and so here are some ready-made sources for obtaining a bird’s eye view of the current situation (the trend is actually more important, but more on that later).

First, a look at Competitiveness.


Then a look at corruption perceptions:


And after evaluating competitiveness, onto indebtedness:


And now onto Monetary Policy conditions: we need to compare GDP Growth Rates with Current Interest Rate levels.

  • If policy rates > gdp growth rates  then the monetary policy environment is tight
  • If policy rates < gdp growth rates then the monetary policy environment is stimulative



And now onto Central Bank balance sheets: do central banks have annunition or not?

Current Situation and Possible Future Path

By looking at these charts, you should be able to see how we are potentially looking at a future decline of the current leaders (US, UK & Europe) in favour of some emerging Asian economies (notably Singapore, Hong Kong) whilst other countries like New Zealand and India seem to have equally bright current and future prospects.

Debt levels (and hence interest on debt) and central bank balance sheets are evident culprits that will impair future growth in most developed nations. But that’s not all. The psychology of most developed nations would indicate an impending deleveraging (to use Dalio’s definition):  people in these countries earn and spend a lot, and if we consider labour productivity, they are expensive. However, since prior generations have fought for these easy living conditions, people are generally  reluctant to constrain their spending in line with their reduced income.

The big picture is that cheap, efficient economies have hard working people that strive 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 policy decisions (mainly the amount of debt utilized, how much corruption there is and how much the government impacts productivity via competitiveness), developed nations enter a stage of saturation.

Over to You

By utilizing essential principles before getting lost in data & details, we have seen how it is still possible to obtain a realistic picture of what the future might hold, if current trends continue. What we are seeing, on macro level, is exactly the same dynamic that happens every 8-9 years via the credit cycle: it seems that civilizations grow, gradually leverage up, reach a plateau and then require a hard deleveraging.

This has definitely happened various times through history as the financial capital of the world has changed place and, it seems, is destined to move once more towards Asia in the future. How far in the future is uncertain, but the data does speak for itself: developed nations have too much debt and central banks have too many assets in their balance sheets. The quality of life is very high and incomes cannot keep up. It’s an expensive population, so to speak.

What Asia lacks, based on our analysis, is competitiveness in the form of less corruption & bureaucracy. They have the advantage in other sectors. We shall see what the future holds…

About the Author

Justin is a Forex trader and Coach. He is co-owner of, a provider of Forex signals from ex-bank and hedge fund traders (get a free trial), or get FREE access to the Advanced Forex Course for Smart Traders. If you like his writing you can subscribe to the newsletter for free.