To understand the dynamics of the global crisis, it is useful to start with a historical perspective. Over the past 130 years, US income per capita (adjusted for inflation) has increased by an average of 1.85 per cent a year (see graph below). The solid line shows that from $3,300 in 1870, US per capita income has increased to more than $45,000 in 2007.

There are three important lessons from this. First, most of the time the increase in income proceeds in a smooth pattern; recessions are short and barely noticeable; expansions are smooth and relatively long. Second, there is one calamity that stands out in this graph – the Great Depression of 1929-33. There is nothing in US economic history that even vaguely resembles this trauma. Third, the graph shows that no matter what happens – mild recessions, depressions, rapid expansions (such as the second world war) – the US economy has always returned to the trend of 1.85 per cent growth in per capita income (the straight line).