In the second quarter of 2019, net worth was 21 times GDP or about 28% above the historical norm from 1952 to 1996. To revert to that historical norm would entail a loss of asset valuation of around $32 trillion.
Wednesday, March 11, 2020
How Low Can You Go?
This is not a prediction. Only an observation. From 1952 to 1996, U.S. nominal net worth of households and non-profits tracked nominal GDP pretty closely. Net worth remained pretty close to 15 times GDP. That consistent relationship ended after 1997. In the third quarter of 2007, net worth was nearly 20 times GDP but by the second quarter of 2009 it had reverted to just 17 times GDP. One might argue that it was roughly 15 times what trend GDP would have been at that time.
In the second quarter of 2019, net worth was 21 times GDP or about 28% above the historical norm from 1952 to 1996. To revert to that historical norm would entail a loss of asset valuation of around $32 trillion.
In the second quarter of 2019, net worth was 21 times GDP or about 28% above the historical norm from 1952 to 1996. To revert to that historical norm would entail a loss of asset valuation of around $32 trillion.
Well, if the markets keep plunging, maybe we shall get back to that long term average.
ReplyDeleteIt would require that real estate and other asset prices also plummeted but, yes, that is a possibility. Did I mention the $55 trillion of emerging and developing country debt?
ReplyDeletehttps://econospeak.blogspot.com/2019/12/2020-hindsight-why-world-is-not-zero-sum.html
Asset valuations depend in part on the cost of capital. Now I do not think all of the rise in the value to GDP ratio is a reflection of a lower cost of capital but maybe some of it might be. Then again expected future growth matters and we are now living in a world where projections of long-term growth are lower than they were say back in the days of American Grafetti
ReplyDeleteSo many feedback loops!
ReplyDeleteTo use literary language, asset value is a metaphor for expected future income that doesn't exist yet. And some portion of current income is generated by the ability to borrow backed by assets whose value reflects the expectation of future income.