One of the most classic moves in the world of finance and economics is to divide stuff by GDP. The stock market is a good example. Just divide it by GDP and suddenly you have a valuation indicator.
So, let’s divide net worth by GDP and see what happens.
By dividing net worth by nominal GDP, we normalize the time series for inflation and general growth in the economy. It gives us a much more stable metric over time and a more insightful measurement of household wealth.
The first thing that sticks out is how devastating of an impact the financial crisis had. Remember, GDP dropped significantly during the crisis. So, wealth had to absolutely plummet to make the ratio fall that fast. Once it stopped falling, it took years to even start climbing again.
Looking more generally at the chart, I find it interesting how many periods are stable. Meaning, the economy and wealth grew at a very similar pace. It makes sense though, as one would assume wealth would be a function of the underlying economic engine.
In terms of the growth since the early 1980s, globalization likely played a big part in that. Wealth grew in the US as domestic businesses expanded abroad. But that international growth wouldn’t really be captured as directly by domestic nominal GDP for the US.
As for what’s next? The market and economic shock from the coronavirus is definitely going to show up. The question is whether it will be a quick spike down or the beginning of a more sustained decline like we saw with the financial crisis. I suppose that’s a matter of the disease trajectory and only time will tell.