Will AI Crash the Economy?

The lines of dominoes being toppled run through every nook and cranny of the economy.

As we all know, the problem with euphoria is the inevitable collision with reality and the resulting disillusionment. But wait--it gets worse.

The new love of your life, your savior who is going to make everything right again, is not just impossibly flawed--they're a con artist. Now that really hurts. They not only stole your heart, they stole your money.

Which brings us to the AI Boom / Bubble. The euphoria is literally immeasurable, but the disconnect from reality is easily visible and can be broken down into measurable bits:

1. AI revenues are orders of magnitude lighter than the sums being invested (capex, i.e. capital investment). The euphoria is based on the idea that revenues will catch up, but the second date is raising doubts about Prince Charming's non-flim-flammed revenues and prospects.

This report has raised eyebrows, and the real question is: OK, so let's say it underestimates revenues by 50%. That means we're at 3% of revenues needed to justify the capex rather than 2%. Maybe this is why Prince Charming invites his amour to poorly lit bistros--he's had, um, work done and he's wary of bright lighting.

$2 trillion in new revenue needed to fund AI's scaling trend (Bain & Company)

2. AI tools are inherently untrustworthy and lend themselves to generating "going through the motions" slop that gives the superficial appearance of value but actually has negative value as it's incomplete, misleading and/or incoherent. Sorting the wheat from the chaff actually takes more time because AI is so adept at generating a superficial gloss. In other words, AI generates time sinks rather than productivity.

AI-Generated 'Workslop' Is Destroying Productivity (Harvard Business Review)

People Overtrust AI-Generated Medical Advice despite Low Accuracy.

Add in that AI slop looks similar to authentic research and that AI tools have a measurable preference for AI-generated content (i.e. AI slop), and we have a toxic cocktail of untrustworthy output.

3. The rate at which major companies are adopting AI is rolling over. This chart reflects the peak of euphoria has been reached by those with the most resources to figure that out and the real-world utility of AI tools is yet to be determined.



The claim making the rounds is that it's not Prince Charming's fault that he's disappointed his enamored amour; she's making unrealistic demands on poor PC. In other words, it's the companies' fault that AI is underperforming. Is this the great promise of AI, to blame the mark and not the con-artist?

4. AI data centers are competing with other users for electricity, water and capital. The apologists' claim is that AI data centers are only a tiny little straw sipping on the grid's total energy, but this overlooks that price is set on the margins and demand for electricity and water by those with unlimited bank accounts will push prices up at rates far above the total additional consumption of AI data centers.

This reality is reflected anecdotally in household complaints that their utility bills have shot up from $250 to $800 a month. Yes, there are other factors at work--the need to invest in grid upgrades, higher insurance rates for catastrophic weather events, etc., but to ignore AI data centers' insatiable demand for water and electricity is like seeing Prince Charming palm your wallet and then making excuses for him.

How Can We Meet AI's Insatiable Demand for Compute Power? (Bain & Company)

By all means fact-check that 60% of Santa Clara's electricity goes to AI data centers: I did. It's true.



This is not to say there isn't a use-case for AI. The point here is the excesses of capital and resources heedlessly thrown at AI in the frenzy of euphoria will crash the economy. I know it seems like there are endless trillions to toss around, but back in the real world, capital isn't infinite, and capital squandered in mal-investments that have little to no real return is capital that could have been invested more productively elsewhere.

The same is true for water and electricity / energy. These resources are not infinite, and when someone with a bottomless bank account enters the market, prices will rise, which means consumers will be devoting scarce income to utilities, leaving them less to spend on other goods and services.

Companies spending scarce capital on AI will be forced to assess the actual financial costs and return on capital invested, and they will pull back. This retrenchment will reverse the parabolic rise of spending on AI, and that will deflate the AI Bubble that has inflated the entire stock market into a euphoric bubble that has now exceeded the extreme euphoria of the dot-com era bubble that popped 25 years ago.

So will AI crash the economy? Malinvestment on an unprecedented scale, disappointing revenues, soaring costs for utilities stripping discretionary income from consumers and the inevitable reversal of investment euphoria and the crash of stock market bubbles bursting--these are not drivers of positive economic development.

Once the stock market euphoria bursts, the wealth effect reverses, and since people feel poorer (and are poorer), they slash borrowing and spending. Those who've maxed out their credit have no choice: stop paying the car loan or rent to keep the lights on.

One domino falling, OK, no big deal. This is different: the lines of dominoes being toppled run through every nook and cranny of the economy. What's been untouchable will be touched--by a hammer.


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My recent books:

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Ultra-Processed Life print $16, (Kindle $7.95, Hardcover $20 (129 pages, 2025) audiobook     Read the Introduction and first chapter for free (PDF)

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $16, (Kindle $6.95, audiobook, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $15, (Kindle $6.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $15 print, $6.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $6.95, print $16, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $6.95, print $15, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $3.95, print $12, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $3.95 Kindle, $12 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


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Price Doesn't Reflect Value, and We're Paying a Steep Price for Confusing the Two

This exploitation is indeed profitable, but there is a very high price to be paid for abusing our trust.

Price and Value--now there's a twisted tale. We've been trained to compare price and buy the lower priced option as the better value, but price doesn't reflect value, and we're paying a very steep price as individuals and as a nation for confusing the two.

In economic theory, price is a signal, a flow of information between the producer, seller and buyer. Like all economic theory, this sounds nice, but what's left out of this information flow is the value of the product or service, which is opaque / unknowable to the buyer.

Price can be low, but value can be lower--or even negative. Consider the aggregate / lifetime "value" of a diet of junk food, fast food, sugary beverages and ultra-processed snacks and foods. The price was presented as "a good value," but what's the "value" of a diet that generates chronic diseases that degrade our lives and cost a fortune to treat?

The "value" of a diet of junk food, fast food, sugary beverages and ultra-processed slop is extremely negative, for the aggregate health consequences are extremely negative and the eventual price of treating the chronic diseases is extremely high.

Every single-use plastic product was a "good value," and now there's micro-plastics everywhere, including our bodies. The full consequences have yet to be tallied, but it's already clear that the "value" of single-use plastic products is extremely negative.
Microplastics Could Be Weakening Your Bones, Research Suggests: The review of more than 60 scientific articles showed that microplastics, among other effects, can stimulate the formation of osteoclasts, cells specialized in degrading bone tissue. (WIRED.com)

What is the "value" of an appliance that breaks down in a few years compared to the "value" of an appliance that lasts for decades? I've often noted the collapse of durability in appliances and other products that has tracked globalization and corporations' exploitation of the fact the value of their products are unknown and therefore a matter of trust: we trust there's value, and that trust can be easily exploited.

So 20 years ago we could buy an appliance that would last 20 years, and now we can no longer do so. The warranties are now one year, and appliances routinely fail in a few years.

This is a catastrophic collapse in value, so what "signal" is price telling us? What price is telling us is that we're chumps, marks conned by corporations who exploit our naive trust that the products and services they're selling have some sort of value that doesn't turn out to be negative.

The nation is paying a steep price for the "low prices" of offshoring critical industrial supply chains. Corporations rushed to offshore production to reduce quality and durability (i.e. value) as the easy way to boost profits: the consumer, unable to discern the actual value of the product, was conned by the "low price" into believing it was therefore a "good value."

So now the nation is dependent on frenemies for essentials--a catastrophic collapse of national security, something whose value is incalculable.

Reducing value and jacking up prices has done wonders for corporate profits. That these profits are the direct result of obscuring the decline of value--or the negative value over a longer time-frame--who cares, for all the matters now is corporate profits are rising and so the stock market bubbles higher.

What economists don't dare say is that corporations boost profits by exploiting their reduction of value and obscuring the negative value of their products and services. This exploitation is indeed profitable, but there is a very high price to be paid for abusing our trust: the eventual collapse of trust in a system that glorifies exploitation because it's so profitable.

There's another price to be paid: the eventual cost of all the negative value is far greater than the initial price paid. Rebuilding our national security is not cost-free, and all the horrific health consequences of a negative-value diet and lifestyle have price tags so high no nation can possibly afford them.

Trusting Corporate America to provide "value" will bankrupt the nation. That process is already advanced, and the banquet of consequences is rapidly expanding.

Corporate profits leaped as globalization reduced quality and durability. Financialization--boosting consumption with debt and the asset-bubble gimmicks of "the wealth effect"--pushed profits even higher.

Then Corporate America--fully globalized and financialized quasi-monopolies and cartels that can buy political influence for mere millions--jacked up prices and reduced value even further. If corporate profits had risen in tandem with inflation (like wages), they would total $1.48 trillion today. Instead they top $4 trillion.



What does "price" tell us about "value?" Absolutely nothing. Keeping the "value" unknown and unknowable is extremely profitable. But what few seem to ponder is the eventual "price" to be paid for exploiting and abusing the trust that is the foundation of society and the economy.

We will pay a catastrophically high price for confusing price and value.


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My recent books:

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Ultra-Processed Life print $16, (Kindle $7.95, Hardcover $20 (129 pages, 2025) audiobook     Read the Introduction and first chapter for free (PDF)

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $16, (Kindle $6.95, audiobook, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $15, (Kindle $6.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $15 print, $6.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $6.95, print $16, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $6.95, print $15, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $3.95, print $12, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $3.95 Kindle, $12 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


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Can Social Security Be Saved for Future Generations?

Are we wise enough to refuse politicians' offer of "free money" to spend today that was stolen from our future, and from our future generations? Probably not.

Can Social Security be saved for future generations? Many have already concluded it's hopeless, and if the current trajectory is left untouched, that is pretty much baked in. Only a radical reform of the program's basic purpose, design and funding mechanisms could return the program to anything resembling sustainability and fairness.

Let's start with a thought experiment: what if Social Security (SSA) had been an authentic pension plan rather than a pay-as-you-go social welfare program? The program's accounting artifices obscure the reality that there is no "trust fund" of cash sitting in an account somewhere; all benefits are paid out of taxes collected from workers and employers today.

An authentic pension plan deducts a percentage from workers' earned income and deposits these into a fund that earns income. The fund is in effect a savings account that accumulates the monthly deposits and interest until the worker retires, at which point the fund starts disbursing monthly retirement payments and continues to collect interest on the fund's remaining balance.

In contrast, the SSA "trust fund" is an accounting gimmick that makes everyone feel warm and fuzzy, but it's nothing more than self-serving delusion. The "trust fund" holds "non-marketable securities," a nice way of masking the truth which is when SSA payroll tax revenues don't cover SSA expenditures, the Treasury makes up the difference by selling Treasury bonds--the same way it pays for all other deficit spending.

When Social Security was launched in the late 1930s, the benefits were modest, and many people didn't live long enough to collect benefits at age 65. The taxes collected from employers and employees were modest. The percentage of the populace who qualified to receive SSA benefits was also modest, while the population paying SSA taxes included every formally employed worker and their employee.

Fast-forward to 1970, the first year I paid SSA taxes as a 16-year old field worker in the summer before my senior year of high school. As the chart below notes, the US population in 1970 was 203 million, and the 25.7 million people who received SSA benefits were 12.6% of the total population. Total SSA program costs were $32 billion. For comparison's sake, the Department of Defense (DoD) budget in 1970 was $80 billion.

In 2025, the situation has changed. The US population increased 67% to 340 million, the number of SSA beneficiaries has nearly tripled from 25.7 million to 74.5 million, and the program now costs about $1.6 trillion annually--almost double the 2025 DoD budget of $840 billion.

As noted on the chart below, SSA program costs have doubled from $800 billion in 2013, only 12 years ago, to $1.6 trillion today.

As is common when programs have essentially unlimited budgets and vast tax revenue streams, mission creep expanded those eligible to receive SSA benefits to include disability and Supplemental Security Income (SSI). These additional beneficiaries added to the program costs without increasing the tax rate collected from employers/employees, which has been unchanged at 12.4% (6.2% each from employer and employee) since 1990.

(The 2.9% Medicare payroll tax rate collected with SSA payroll taxes has been unchanged since 1986: 1.45% each for employer and employee.)

To answer this question--what if Social Security (SSA) had been an authentic pension plan rather than a pay-as-you-go social welfare program?--I did a deep dive into my own 55-year record of SSA contributions. This required some heavy lifting, as annual changes in inflation and the interest rate paid must be accounted for.

I used the BLS inflation calculator to adjust annual inflation, and the 10-year US Treasury bond yield as the benchmark for interest--in other words, as if my entire SSA payroll tax had been invested at the end of each year in 10-year US Treasury bonds. Yes, I know there are many quibbles with these benchmarks, but at least we can agree they are reasonable benchmarks.

The SSA calculates your benefit based on your highest 25 years of income, so the lowest-income 30 years of my 55 years of paying SSA and income taxes are dropped. The SSA also considers the average income of full-time workers: SSA National Average Wage Index. (On rare occasions, my income exceeded the average, but was generally sub-average.)

Adjusting your income for inflation and then organizing the adjusted number from highest to lowest offers interesting insights into the purchasing power of your wages over time. These reflect each decade's broad-based standard of living, as the higher the purchasing power of one's wages, the higher one's standard of living.

Adjusted for inflation, my highest earnings years were: 1989, 1997, 1990, 1985, 1976 and 1977. Two in the 1970s, when I was 23 and 24 years old, two in the 1980s, and two in the 1990s, decades in which more of the economic expansion "trickled down" to wages, a trend that ceased by the turn of the century when the dot-com bubble burst.

It is a sobering reflection on the US economy that the purchasing power of my wages as an apprentice carpenter at age 23 were rarely equaled in the five decades since. In terms of what my wages could buy, my earnings have never gone as far as they did in the mid-1970s, which is close to the peak of labor's share of the national income (chart below).

By pure happenstance, my monthly Social Security retirement benefit is within a few dollars of the national average, so my record happens to reflect the national average. (I started drawing my benefit at full retirement age 67. I continue to pay both employee and employer SSA payroll taxes on my self-employed income as a scribbler, ahem, "content creator.")

By age 67, the total nestegg of my SSA payroll taxes (not Medicare, only SSA) collecting whatever yield was paid by 10-year Treasury bonds reached $382,000 at age 67. Assuming the bond yields stay around where they are today--which are historically rather average--my nestegg would fund my retirement benefits until age 87, which significantly exceeds the current average life expectancy of American males (78 years).

I understand that many would say investing the payroll taxes in Treasuries is effectively tossing the money on a bonfire, but consider the possibility that if the entire working populace had a stake in Treasuries surviving a financial bubble collapse, then they might start electing (and re-electing) politicians who wouldn't stripmine everything within reach to get re-elected. That change in values and voting would change the course of the system.

The point of this exercise is to show that if SSA were converted to a true pension plan system, the average wage earner could accumulate a self-funding pension plan just by investing the payroll taxes in Treasury bonds. Yes, I know many would prefer to invest in gold or bitcoin or stocks, but nobody would be stopping anyone from investing their non-SSA savings however they wished.

Can Social Security be saved for future generations? Let's re-phrase the question in two ways.

1. Could money pile up for decades without politicians finding an excuse to drain that pool to win re-election by distributing "free money"? Not unless every politician who even suggested draining the pool for an "emergency" were voted out of office in the next election, without exception.

2. Are we wise enough to refuse politicians' offer of "free money" to spend today that was stolen from our future, and from our future generations? Probably not. And that's why Social Security is doomed to insolvency, and why we'll never muster the political will to replace pay-as-you-go with a real pension plan for America's wage earners. Short-term expediencies are the order of the day, as the Prime Directive is do whatever it takes to get re-elected every two years.



Wages share of gross domestic income: in a free-fall since 1970, and a cumulative total of $149 trillion shifted from labor to capital.



SSA tax rates 1937 to 2025


Check out my new book Ultra-Processed Life and my updated Books and Films.

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My recent books:

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Ultra-Processed Life print $16, (Kindle $7.95, Hardcover $20 (129 pages, 2025) audiobook     Read the Introduction and first chapter for free (PDF)

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $16, (Kindle $6.95, audiobook, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $15, (Kindle $6.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $15 print, $6.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $6.95, print $16, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $6.95, print $15, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $3.95, print $12, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $3.95 Kindle, $12 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $3/month patron of my work via patreon.com.

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Money, Credit, Growth and Depression: It's Complicated

If "growth" is all that matters, that leads to depending on credit and asset bubbles, which are self-liquidating in ways few see because, well, it's complicated.

Many people anticipate the demise of fiat currencies, for good reasons. This is the motivation for calls to return to the gold standard--currency backed by the tangible value of gold--or the equivalent use of bitcoin.

What few seem to ask is: why did authorities embrace fiat currencies in the first place? What prompted them to replace a gold-backed monetary system with a fiat currency system?

Were they misled by monetary theories, or delusional, or merely desperate?

Let's consider the complications of money in a system that demands "growth." As I noted in my recent post for subscribers, Not What We Expected: Why Our Fixes Will Fail, if banks are allowed to originate loans based on reserves--fractional reserve banking--then most of the "money in circulation" is created not by adding gold or bitcoin to the system but by originating mortgages, commercial credit, etc.

If credit is limited to loaning out a percentage of cash deposits, credit becomes scarce, and everything that depends on abundant, affordable credit--vehicle sales, real estate purchases, college diplomas, consumer credit--all dry up and blow away. This collapse of "growth" is called a depression. Without credit, assets collapse in value, savings are depleted to pay bills as employment shrinks, and so on.

This is why the early American economy was starved for credit: everybody wanted to do something great but they had no access to the money needed to do something great. Banks arose and failed, wiping out savers and borrowers alike, as loans were called and assets were liquidated for pennies on the dollar.

So how do you expand credit without expanding money in circulation? You can't, as credit-money is money, period. So $1 billion in gold or bitcoin backs the money supply, but what happens when banks issue $10 billion in mortgages and loans, money that is created out of thin air and enters circulation? Every dollar that was backed by X quantity of gold or BTC is now backed by 1/10th of X.

Then there's foreign trade. If imports and exports don't zero out--$1 billion in imports is balanced by $1 billion in exports--then the balance is paid in gold. Nations running trade deficits eventually run out of gold.

This was the case for the US in the late 1960s and early 1970s, when the US ran sustained trade deficits with its allies for geopolitical reasons: it was deemed essential to prop up our allies to ward off the threat of the USSR and the appeal of Communism. Let your economy slide into Depression, and the promises of Communism start looking very attractive to people immiserated by impoverishment.

Once a nation runs out of gold, trade deficits are no longer possible. The problem is that sometimes trade deficits make economic or geopolitical sense, and so ending trade deficits is catastrophic for both importer and exporter.

OK, it's complicated. But it gets more complicated.

There's an interesting phenomenon we call The Network Effect: the more people that start using a network--for example, an online platform--the more useful and valuable the network becomes to both the users and the owners.

For example, Meta/Facebook. When FB was limited to university students, it was of limited value to users. Once it expanded to a global user base of 3 billion people, it became more valuable to users and its owners, as the data collected from users and sold to advertisers became much more valuable. Meta is now worth $1.9 trillion, larger than the GDP of Spain or South Korea. That's The Network Effect.

Currencies also manifest The Network Effect: the greater the sum in global circulation, the more valuable the currency becomes. (Note that issuing $1 trillion in a currency isn't the same as $1 trillion in global circulation: the currency must have some value and utility to be circulating in the global economy.)

The utility of a currency isn't based solely on the quantity in circulation, of course; a currency's value is based on trust in the currency as a reliable store of value over the duration of the trade, its status as a commodity of known value that everyone will accept in payment, its liquidity, i.e. the ease of converting it into some other currency or commodity, and the "backing" of the currency: the central bank and national economy that issues it.

The nation that issues the currency with the greatest Network Effect has an exorbitant privilege: it can issue bonds and emit fresh currency in size that enter circulation, in effect trading fiat currency backed by The Network Effect for real-world commodities.

As many have pointed out, this is both a blessing and a curse. But it's hard to part with the power generated by The Network Effect--not just for the #1 currency, but the #2 and #3 and #4 currencies as well.

The real problem here isn't just the complications of money: it's the insanity of needing "growth" by any means available, including borrowing more money than can ever be paid back and debauching the currency to maintain the illusion of "growth" even as the resulting inflation slowly impoverishes the majority of the population who have been reduced to debt-serfs or speculators counting on credit-driven bubbles in stocks and real estate to maintain their lifestyle and financial security.

If "growth" is the Prime Directive, then credit and fiat currency become the means to achieve it. That's the story of the 20th century. That was the "blessing" phase. The story of the 21st century is the "curse" phase, and there is no exit if "growth" is all that matters, because that leads to depending on credit and asset bubbles, which are self-liquidating in ways few see because, well, it's complicated.




Check out my new book Ultra-Processed Life and my updated Books and Films.

Become a $3/month patron of my work via patreon.com

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My recent books:

Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site.

Ultra-Processed Life print $16, (Kindle $7.95, Hardcover $20 (129 pages, 2025) audiobook     Read the Introduction and first chapter for free (PDF)

The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $16, (Kindle $6.95, audiobook, Hardcover $24 (215 pages, 2024) Read the Introduction and first chapter for free (PDF)

Self-Reliance in the 21st Century print $15, (Kindle $6.95, audiobook $13.08 (96 pages, 2022) Read the first chapter for free (PDF)

When You Can't Go On: Burnout, Reckoning and Renewal $15 print, $6.95 Kindle ebook; audiobook Read the first section for free (PDF)

Global Crisis, National Renewal: A (Revolutionary) Grand Strategy for the United States (Kindle $6.95, print $16, audiobook) Read Chapter One for free (PDF).

A Hacker's Teleology: Sharing the Wealth of Our Shrinking Planet (Kindle $6.95, print $15, audiobook $17.46) Read the first section for free (PDF).

Will You Be Richer or Poorer?: Profit, Power, and AI in a Traumatized World
(Kindle $3.95, print $12, audiobook) Read the first section for free (PDF).

The Adventures of the Consulting Philosopher: The Disappearance of Drake (Novel) $3.95 Kindle, $12 print); read the first chapters for free (PDF)

Money and Work Unchained $6.95 Kindle, $15 print) Read the first section for free


Become a $3/month patron of my work via patreon.com.

Subscribe to my Substack for free

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Is This the Last Bubble?

The consensus holds there will be another bubble after the Everything Bubble pops, but this might be misplaced confidence in the godlike powers of central banks.

The consensus holds that central banks--the Federal Reserve in the US--will gradually inflate away the world's rising debt burden while propping up assets and the economy with the usual bag of monetary magic: suppress interest rates so debt service costs ease, increase the money supply and credit to prop up asset bubbles in stocks and housing, and thereby generate growth in consumption via the elixir of "the wealth effect:" as assets loft higher, everyone feels richer and so they borrow and spend more.

Well, not everyone, because only the top 10% own enough assets to feel "the wealth effect," but since they account for 50% of all consumer spending, that's enough to maintain the status quo, in which the bottom 90% lose ground (especially the bottom 60%) and the top 10% are doing splendidly.

Should the bubble du jour pop, no worries, central banks will rush to the rescue as they have for 25 years, goosing money supply and credit, opening the floodgates of liquidity, pushing interest rates down so everyone and every entity can borrow and spend / speculate more, more, more.

This is a nice story, and proponents have the past 25 years of history to back it up. But beneath the surface appeal of this story--a Hollywood ending every time, as the Fed will inflate another bubble, one after the other in an endless loop--there are stirrings in the deep that suggest the Everything Bubble is the last bubble of its kind, and attempts to inflate another bubble when this one pops will collapse the entire rickety contraption.

In other words, everything is forever until it is no more. Let's consider some points that speak to the nature of speculative bubbles.

1. Speculative bubbles don't require central banks increasing money supply and manipulating interest rates. Recency bias leads us to imagine that central bank policies inflate and pop speculative bubbles via monetary levers, but the colossal South Seas Bubble in 1720 that popped with such devastating consequences arose and fell in the pre-central bank era. The madness of crowds--or more specifically, the greed-driven madness of greedy crowds is the core driver of speculative frenzies / bubbles.

2. Confidence is the foundation of speculative frenzies. Yes, confidence, as in a con. Back in 1720, the South Seas Company was supported by the establishment, and so confidence was high that it was a can't lose proposition. The riches skimmed by early investors encouraged this confidence.

Today, confidence that the Fed will rush to the rescue should the Everything Bubble pop is high, as is the confidence that the AI Bubble isn't a bubble because AI is going to change everything and that transformation will be immensely profitable--if not for the gold miners, then for those selling the miners picks and shovels.

3. Quasi-religious fervor, confidence, staggering gains and speculative frenzies all meld into one overflowing river, sweeping all before it. The primary force here is the belief that this isn't irrational, or speculative--it's all based on solid facts. That this was the exact same belief that powered bubbles in 1720, 1925-1929, 1998-2000 and 2004-2008 is brushed aside, for as we all know, this time it's different. Of course it is, but perhaps not in the way that the consensus anticipates.

Just as a break from all the fun and games, let's consider a chart of M2 money supply, generally conceded as the driver of stocks rising, and compare it to GDP--a measure of economic expansion--and the S&P 500 stock index (SPX).



It's interesting to note the ratio of M2 and GDP. That money supply and economic expansion would rise together qualifies as common sense, but what makes this interesting is the slippage in the ratio.

For two decades, GDP was roughly double M2. In 1981, M2 was $1.6 trillion and GDP was $3.1 trillion. In 2001, M2 was $5 trillion and GDP was $10.5 trillion. So far so good.

In Q1 2009, at the bottom of the stock market crash / Global Financial Crisis, there was bit of slippage: M2 was $8.4 trillion and GDP was $14.4 trillion--no longer 1 to 2.

By the pre-Covid high watermark of Q1 2020, M2 was $15.5 trillion and GDP was $21.7 trillion. After the Covid crash and stimulus, here in Q2 2025 M2 is $22.1 trillion and GDP is $30.3 trillion-- 1 to 1.37.

There's a phrase that describes this: diminishing returns. Goosing money supply is no longer goosing GDP to the same degree it once did.

Meanwhile, back in Speculative Frenzy-Land, the SPX is up 10X, from the biblical low in Q1 2009 of 666 to today's high of 6660 (well, 6656, but close enough).

This suggests that the means of boosting GDP is now inflating bubbles, not actual economic activity. This is supported by the chart of money velocity, which is a measure of economic transactions across time. It's generally conceded that money velocity increases in good times and decays in not-to-good times. Here we see that money velocity has fallen off a cliff and never recovered the glory days of widespread, organically expanding economic activity.



It is not coincidental that the peak of money velocity in the mid-1990s Internet boom aligns with the peak of wage growth and the bottom 50%'s share of financial net worth. Simply put, the 1990s were the last era of widespread prosperity of the sort that actually "trickled down" to the bottom 90%. This was also the last era in which housing was broadly affordable to households with average incomes.



Saying that money velocity is an indicator of economic catastrophe doesn't go over well in polite company, but there it is. Somebody barfed in the punchbowl, sorry about that.

Lastly, consider this chart of debt and growth in the US, courtesy of Tim Morgan of the invaluable analytic site Surplus Energy Economics. Note that the blue indicators of growth are considerably smaller than the red indicators of debt.



Put all this together and it's clear that stock market and housing bubbles are the only sources of "growth," which is another way of saying that "growth" is a chimera masking the second-order effect of goosing money supply, credit, debt and speculative asset bubbles: extremes of wealth and income inequality as the top 10%'s wealth, income and spending have soared while the bottom 90% have fallen behind.



Consider the possibility that the AI Bubble is a close match for the 1720 South Seas Bubble, a bubble that sucked in the smart money (Sir Isaac Newton) and dumb money alike, and then collapsed in spectacular fashion wiping out true believers, gamblers, Wise Men and the credulous--everyone who participated other than those who sold early and stayed out as the bubble inflated to giddy heights. Due to the limitations of Wetware 1.0, the number of people who can manage to do that is so small that it's signal noise.

The consensus holds there will be another bubble after the AI Bubble / Everything Bubble pops, but this might be misplaced confidence in the godlike powers of central banks. If the Fed just gooses money supply, credit and crushes interest rates, the next bubble might be in the 2028 equivalent of Pet Rocks or Beanie Babies, it won't matter. There will always be another bubble because the Fed wills it to be so.

Or perhaps the limits of this serial bubble-blowing have already been reached, and this is the last, final bubble before the reckoning where the banquet of consequences has been set and Nemesis is catering what's served.


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Thank you, J.N. ($100), for your outrageously generous subscription to this site -- I am greatly honored by your steadfast support and readership.		Thank you, Richard S. ($70), for your marvelously generous subscription to this site -- I am greatly honored by your steadfast support and readership.

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Thank you, David J. ($70), for your splendidly generous subscription to this site -- I am greatly honored by your support and readership.

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