As shown below in chart 1, real per capita GDP has increased at an average rate of a shade less than 2% over the
last 100 years and didn’t vary a lot from that. This is because, over time, knowledge increases, which in turn
raises productivity and living standards. As shown in this chart, over the very long run, there is relatively little
variation from the trend line. Even the Great Depression in the 1930s looks rather small. As a result, we can be
relatively confident that, with time, the economy will get back on track. However, up close, these variations from
trend can be enormous. For example, typically in depressions the peak-to-trough declines in real economic
activity are around 20%, the destruction of financial wealth is typically more than 50% and equity prices typically
decline by around 80%. The losses in financial wealth for those who have it at the beginning of depressions are
typically greater than these numbers suggest because there is also a tremendous shifting of who has wealth.
As shown below in chart 1, real per capita GDP has increased at an average rate of a shade less than 2% over thelast 100 years and didn’t vary a lot from that. This is because, over time, knowledge increases, which in turnraises productivity and living standards. As shown in this chart, over the very long run, there is relatively littlevariation from the trend line. Even the Great Depression in the 1930s looks rather small. As a result, we can berelatively confident that, with time, the economy will get back on track. However, up close, these variations fromtrend can be enormous. For example, typically in depressions the peak-to-trough declines in real economicactivity are around 20%, the destruction of financial wealth is typically more than 50% and equity prices typicallydecline by around 80%. The losses in financial wealth for those who have it at the beginning of depressions aretypically greater than these numbers suggest because there is also a tremendous shifting of who has wealth.
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