The AI Depression

Either way AI goes--replacing human labor or failing to meet today's lofty expectations--the result is the same: an economic Depression.

Either way AI goes--replacing human labor en masse, or failing to meet today's lofty expectations--the result is the same: an economic Depression with no way out.

In effect, AI is self-liquidating: if it follows the projections of its most ardent promoters and replaces most human workers, it collapses the economy and society, and if it underperforms, it's an enormous waste of capital and resources that sinks the economy into Depression.

Let's break down each pathway to Depression.

To its promoters, AI is unstoppable and will generate super-abundance in whatever it creates for near-zero cost, and this abundance will effortlessly be shared with everyone because AI is super-productive.

Here is an example of this projection:

The Displacement of Cognitive Labor and What Comes After.

Ai agents will replace cognitive (i.e. creative / white-collar) labor, and AI-powered robots will replace manual labor, freeing humanity to find meaning not in work but other activities that replace work as the source of meaning.

What's striking about this projection is it doesn't mention the physical-world constraints of Growth At Any Cost / Waste Is Growth such as energy, fresh water, fertile soil, etc. We are left presuming AI will magically eliminate all such material constraints by means unknown but guaranteed to manifest because AI can solve anything--we're constantly assured it's already a super-intelligence.

This is the magical thinking at the heart of The Mythology of Progress: that all new technology is always positive, and every physical limit can be overcome by innovation / ingenuity, the only impediment to super-abundance is the naysayers.

The essay also doesn't present a plausible source of the trillions of dollars needed to fund Universal Basic Income (UBI) for everyone who no longer earns a living from work.

The common assumption here is that AI's productivity will automatically be profitable: since AI can grow all the food, it will be cheap. But if there is insufficient water and the soil has been depleted, AI will grow no more food than humans because the constraints are physical, not cognitive.

As for profitability, consider this comprehensive overview of the rapid advances in robotics / AI in China:

Inside China's robotics revolution: How close are we to the sci-fi vision of autonomous humanoid robots? I visited 11 companies in five Chinese cities to find out.

"As government subsidies flood the robotics sector, Chen and his peers are bracing for the usual pattern: price wars and cost cutting maneuvers that leave companies barely able to turn a profit."

In other words, as private capital and state funding pour money, resources and talent into the hot new sector, profitability vanishes: there's an oversupply of everything and a customer base that's too narrow to generate demand enormous enough to absorb all the products at prices that generate profits.

The idea that AI will generate trillions in "free wealth" that can then be distributed to the hundreds of millions of displaced workers in sufficient sums to enable a vast free-spending consumer class is not just unrealistic--it's a pipe dream.

Put another way: if displaced workers are getting barebones Universal Basic Income or equivalent--subsidized energy and food, etc.--then the number of people who will be able to buy a robot-assembled new vehicle or a household robot-servant will be far too limited to support a scale of production that offers economies of scale.

This is the Henry Ford insight: if workers (or displaced workers) have minimal incomes, they can't afford the products capitalism is producing.

Karl Marx viewed these dynamics--declining profits as capital expands and seeks a return while immiserating the workforce to reduce costs, reducing demand for expanding production--as self-liquidating: capitalism's core gearing collapses capitalist economies. It is ironic that Marx's description may finally reach fruition in the end-game of AI.

Another element that the AI promoters never dare mention is much of the "cognitive work" AI will do is what David Graeber memorably called BS Work--tasks without any real productive value, busy-work demanded by unproductive, complex organizations that reached this level of dysfunction as their initial modest cost structure transmogrified into bloated, extractive fiefdoms (higher education, healthcare, defense, etc.) whose share of the economy has soared as administrative costs (i.e. BS Work) generate make-work.

Consider this chart of healthcare employment (via J.F. MD). As Healthcare's share of the economy has soared from 5% to nearly 20%, the quantity of BS Work (administrative tasks) and the workforce to perform this work have also soared. (The chart of professors and university administrators is a close match for this: flatlined number of professors, monumental increases in administrative staff.)



Now the proponents of AI are salivating at the prospect of charging the same absurdly high fees while eliminating all those high-cost human physicians and technicians.

What about the immense bloat of administration? Of course AI will replace all those workers, too, and once again, the goal here isn't to reduce fees by 80% by replacing the current bloated, profiteering, complex system with a system that doesn't generate administrative BS Work; the goal is to eliminate 80% of the labor costs but keep charging the same high fees to boost the profits of the owners of the Healthcare industry, which I call Sickcare because it profits from illness and monopoly, not from health.

This is why AI is self-liquidating: the goal isn't to replace the dysfunctional, extractive monopoly-cartel structure of the economy: the goal is to maintain this structure as-is and increase its profitability by eliminating costly human labor.

The owners of AI tools are planning to reap billions in profit by selling their tools to corporations and governments intent on keeping the status quo asymmetries not just intact, but more profitable.

AI is the contrivance that the most grotesquely self-serving parts of our system are attracted to, as they want the immense profits to be reaped by reducing the bothersome expense of human workers.

There's another fundamental problem with the AI will deliver super-abundance to us all fantasy.

Despite enormous investment of capital and ingenuity, energy and materials that were once cheap (as measured by EROEI--energy return on energy invested) have become more expensive (as measured by EROEI) as the cheap-to-extract deposits have been depleted.

The Fracking Miracle is exhibit #1: even industry insiders are admitting that the limits of physics, chemistry and cost are weighing on fracking output. Like Nature, ingenuity and technology also have limits.

If engineering and materials had no limits, airliners would be flying 1,000 kilometers on a liter of fuel. The reality is advances are incremental and returns diminish.

Also unmentioned by the enthusiasts is the fact that AI itself has costs that can't fall to near-zero. So the idea that AI will magically generate near-zero cost goodies for everyone is fundamentally disconnected from reality.'

Boosting a thousand--oh, heck, make it a hundred thousand--data centers into orbit is inherently costly, even with reusable rockets.

As noted previously, an oversupply of robots and AI means profitability is near-zero, so where is the financial justification for the thousand orbiting data centers, or their replacements?

The last Great Myth of Progress that is dismissed with a wave of the "ingenuity" hand is the belief--or if you prefer, faith--that every technological revolution inevitably generates more and better jobs, as this is The Nature of Technological Revolutions.

This belief rests on recency bias: due to humanity's rapid exploitation of hydrocarbons and easy-to-extract minerals, human labor was replaced by energy slaves. The discovery of ever more deposits of hydrocarbons and minerals created a belief that resources are essentially limitless, if we just dig / drill deeper, build floating platforms at sea, etc. That all these "solutions" carry enormous costs is not mentioned, as "money" is abundant because we can create as much as we need.

It is not a Law of Nature that technology automatically creates more and better jobs. As agricultural labor was replaced by machines, the workforce was repurposed to operate machines in factories running on cheap hydrocarbons, and as more sophisticated machinery replaced human labor on assembly lines, the administrative, marketing, service, etc. industries trained workers to toil in cubicles--cognitive labor.

There is no industry that needs humans on the same scale as those being replaced by AI. "High touch" labor--waiters, caregivers, violin instructors--will all be replaced by robots / AI, too.

An elite may have the wealth to hire a human as a status signifier, but since the majority will be scraping by on UBI, the wealth needed to hire humans will be limited to an elite--an Tech-Financier oligarchy or nobility.

This pathway to Depression can be summarized as: AI is the last great hope of a system that's in the process of self-liquidating due to its disconnect from the reality that the physical and financial worlds have inherent limits that preclude infinite growth of consumption of material goods paid for with "money" borrowed into existence.

If AI fails to "save the system" by replacing workers and generating the vast wealth needed to support all the displaced workers, the system fails faster than it otherwise would have due to the staggering sum of capital and resources squandered on the chimerical AI Will Not Just Save Us, It Will Make Us All Rich techno-fantasy.

This alternative pathway to Depression is that AI underperforms due to intrinsic limits of its models. I mentioned six such factors in Why AI Malware (and Harmful Second Order Effects) Are Out of Control.

Here are two more of note:

Agents of Chaos
"Focusing on failures emerging from the integration of language models with autonomy, tool use, and multi-party communication, we document eleven representative case studies. Observed behaviors include unauthorized compliance with non-owners, disclosure of sensitive information, execution of destructive system-level actions, denial-of-service conditions, uncontrolled resource consumption, identity spoofing vulnerabilities, cross-agent propagation of unsafe practices, and partial system takeover. In several cases, agents reported task completion while the underlying system state contradicted those reports. We also report on some of the failed attempts. Our findings establish the existence of security-, privacy-, and governance-relevant vulnerabilities in realistic deployment settings. These behaviors raise unresolved questions regarding accountability, delegated authority, and responsibility for downstream harms, and warrant urgent attention from legal scholars, policymakers, and researchers across disciplines."

AI, Human Cognition and Knowledge Collapse.

The idea here--presented by many others in similar forms--is that AI is only useful to those who have the means to put its output in proper context. This requires experiential (i.e. tacit) knowledge and a comprehensive understanding of the field of inquiry.

Those with little experiential knowledge and only a shallow grasp of the field accept AI as "the truth" because AI mimics understanding so fluidly. This fluidity replaces human learning from experience, and the net result is ignorance masquerading as knowledge becomes the norm.

When the system is challenged by novel crises / asymmetries, AI reveals its core flaw--it's untrustworthy--and the system collapses.

I want to stress that the idea here isn't that AI has no utility; the idea here is the utility (i.e. real Progress) comes with built-in limits and downsides (Anti-Progress) that cannot be eradicated with coding tweaks. The evidence is mounting that much of AI is automated Ultra-Processed Cognition that many people feel obligated to enthuse about lest they appear out of step with the In Crowd which harvests status by being an Early Adopter of The Latest Tech Thing.

Hundreds of billions of dollars are being sunk into AI with increasingly short half-lives as everyone races to replace the Latest Iteration. What is glaringly obvious but too disruptive to admit openly is there are few realistic prospects for profitability. Much of the funding comes from what my colleague Tim Morgan (Surplus Energy Economics) calls the 'ads and algorithms' business model--reaping enormous profits from selling marketing and engineering algorithms to be addictive and extractive ("dynamic pricing", etc.).

Marketing and algorithms can only generate massive profits in a free-spending consumer economy that depends on ever-expanding debt-fueled spending and ever-expanding resource extraction: we need more jet fuel to expand leisure travel, and more lithium and other minerals to power electric aircraft, flying cars, etc.

That this free-spending consumer economy is also self-liquidating is taboo: growth at any cost demands debt expands fast enough to fund the Waste Is Growth Landfill Economy, which itself demands ever more resources to be squandered and tossed in the landfill (i.e. "consumed"). Here is "growth" in action:



Here is an artificial mountain of Waste Is Growth consumption:



Abundant credit generates credit-asset bubbles that pop with devastating consequences, and squandering resources on the belief that ingenuity and AI will magically replace easy-to-extract resources with hard-to-get resources at the same cost and rate of expansion leads to higher costs and scarcities that eventually limit the "growth" the system needs to avoid collapse.

Both pathways rest on the quicksand of moral decay: per Adam Smith, capitalism only functions as the idealists believe--allocating capital and resources with unmatched efficiency--if there is a culture and social structure that imposes a moral order on how private gains are amassed.

In the present era of moral collapse, the ideal way to amass private gains is by establishing a monopoly or cartel that fixes prices and buys political protection in a thoroughly corrupted political system: "democracy" as an open auction for political favors.

AI fits seamlessly into this extractive, self-liquidating system: AI will boost profits by replacing costly human labor. The owners of AI and the owners of sectors that buy AI will profit immensely. That's all we need to know about it.

No one claims AI will fix the moral rot that is as self-liquidating as Waste Is Growth consumerism, credit-asset bubbles and AI. AI is just a tool the monopolies and cartels are seeking to control and profit from--in effect, automating moral decay.

If AI fails to be profitable, then the hundreds of billions will wash away as mal-investments that cannot be replaced with new capital. That failure will generate a different flavor of Depression, one accelerated by the self-liquidating collapse of credit-asset bubbles and the Waste Is Growth consumption that depended on those bubbles expanding forever.

AI automates Ultra-Processed Cognition and moral decay. Narrative control--AI is going to make us all rich!--doesn't change the self-liquidating nature of the system and its supposed savior, AI.




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Risk and Privilege

As systemic risks rise, what matters is the thickness of one's buffers against bad things happening. Those with wealth, power and privilege have sea walls, the rest of us have crumbling sand castles.

Risk and Privilege are intertwined in ways that define our lives and the system we inhabit. Privilege boils down to being buffered from risk, and this is scale-invariant, meaning that it works in the same way from the individual to the nation-state: wealth and power serve to insulate us from risk. Those without wealth and power are fully exposed to risk.

Concrete examples illustrate this dynamic. A rich kid and a poor kid both get busted for possession of Schedule 1 drugs. The rich kid's parents hire a hot-shot attorney who opts for a trial by judge not a jury, as the judge's kids go to the same private school as the attorney's kids and the rich kid.

This defendant shouldn't have his productive life ruined by a youthful indiscretion, blah blah blah. The rich kid gets probation.

The overwhelmed public defender who has maybe ten minutes for the poor kid's case tells the poor kid, you're looking at a maximum of ten years, it's open and shut, what the prosecutor will accept is a plea bargain where you plead guilty to a lesser charge, they get the conviction and you'll be out in a year. The poor kid has no choice and takes the plea bargain. Now he's a felon, on a much different track into adulthood than the rich kid.

Same crime, same process, different outcome.

On the scale of mega-corporations, the same gearing operates. Having a "friendly" senator with seniority privileges who can insert a tax break designed solely to benefit one corporation into must-pass legislation is standard practice for companies that distribute millions of dollars in campaign contributions and lobbying fees. Smaller scale businesses have no equivalent access to government subsidies.

Same business sector, same system, different outcome.

Nation-states that have the privilege of "printing" money that others accept in payment have an unmatched buffer against risk because they can create financial buffers: if a bad thing happens, fresh money either makes it go away or mitigates the fallout.

On the largest scale--the entire socio-political-economic system--the buffers against risk have been transferred from the lower classes to the upper class, corporations and insiders, all of whom hold privileges enforced by the government.

Over the past 50+ years, the buffers against risk that were once part of the social contract for the bottom 90% have been chipped away or withdrawn. Affordable higher education: withdrawn, gone. Pensions above and beyond Social Security: withdrawn except for government employees. Affordable healthcare: withdrawn from all those who don't have a permanent high-level job in Corporate America (janitorial services, etc. are all contracted out to companies with near-zero benefits) or the government.

Now employment comes as a 1099--every worker is "self-employed" in the sense they have no pension or healthcare but they're paid as employees, not as self-employed workers who control what they charge and what work they do.

Many people are like me: we pay more in "self-employment" taxes (the 15.3% Social Security/Medicare tax) than we do in income tax as the burdens of pensions and healthcare have been shifted from employers to workers, either partially or totally.

The wealthy have privileges that are so ingrained we take them for granted. Tax rates for capital gains--the vast majority of which flow to the wealthiest few--are taxed at 20%, while 1099 workers pay 15.3% on every dollar up to $184,500 plus 22% for income over $48,475, a total of 37.3%.

Income from capital flows to those who own capital (stocks, bonds) and those who own and control capital (businesses).



This follows a power-law distribution: the vast majority of the income-producing wealth is held by top 10%, and most of that is held by the top 0.1%.



The point here isn't just the asymmetric distribution--it's the buffers against risk have been dismantled by government policies favoring those with the least exposure to risk. The percentage of the national output / economic activity that is distributed to wage earners has been declining for decades. The money and the privileges it buys have been diverted to benefit capital.



This is what's different now: apologists can claim that "the rich have always collected most of the income and owned most of the wealth," but that's not the point: the point is the buffers against risk have been dismantled as policy decisions that favored the already-wealthy and already-privileged who already had ample buffers against risk.

For the bottom 80%, the lifestyle you ordered is out of stock. For the top 10%, the serial credit-asset bubbles have fattened their wealth and income. Risk for them is now concentrated in The Everything Bubble: should it pop, their buffers will melt like sand castles in a rising tide of risk.

Those in the 81%-89% bracket reckon they're "almost rich" but this is aspirational delusion: the ladder up is missing rungs and the slide down is very slick indeed.



As systemic risks rise, what matters is the thickness of one's buffers against bad things happening. Those with wealth, power and privilege have sea walls, the rest of us have crumbling sand castles. It wasn't always this imbalanced and precarious, and that change will have consequences few anticipate and no one will fully control.


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Welcome to the Stockyard of Unaffordability

The herd here in The Stockyard of Unaffordability isn't cheered much by the cost of a TV dropping $50 while everything essential to life has gone up by $500 or $5,000.

Welcome to the herd jammed into The Stockyard of Unaffordability, where prices keep rising and it gets more crowded as those who reckoned they were always going to be able to afford their free-spending ways end up here.

As I have endeavored to explain in recent posts, asymmetries of scaling and risk create extremes that undermine our standard of living and quality of life:

1. Asymmetric scaling of credit generates self-liquidating credit-asset bubbles that pop, devastating the economy: Why Credit Creates Bubbles That Break the Economy.

2. Asymmetric scaling of AI malware and slop are making an AI Depression inevitable: Why AI Malware (and Harmful Second Order Effects) Are Out of Control

3. Asymmetries of risk, resources and wealth generate mutually reinforcing crises, i.e. a polycrisis with no easy resolution: This Polycrisis Is Unique

4. Recency bias (the Fed always rides to the rescue) and asymmetries of credit / speculation generate rosy projections of limitless expansion of wealth, until the bubbles all pop at once: Paging Nostradamus: You Have a Margin Call

5. When asymmetries of risk, credit, etc. create extremes that break down, this leads to Model Collapse, the collapse of the status quo's understanding of how the world supposedly works: Iran, En-Lai, Napoleon, Mike Tyson and Model Collapse

Everyone has a plan until they get punched in the face.

6. All these realities are obscured by the perverse incentives to flood every nook and cranny of media with sensationalized click-bait / slop: Perverse Incentives Have Created a Runaway Media Monster

Meanwhile, the asymmetries of credit that benefit the wealthiest few at the expense of everyone else are jacking up prices across the entire economy, a trend that is boosted by geopolitical risks and scarcities.

The bill from the veterinary clinic went from $150 to $1,000 because private equity bought up all the clinics to assemble a local quasi-monopoly. The same thing happened in rental housing: once the dominant owner jacks up rents, all the small-fry owners follow suit, a dynamic that ratchets rents higher.

Here in the The Stockyard of Unaffordability, people can no longer afford rent, healthcare, childcare, senior care, higher education, insurance, vehicle repairs or a pet. But TVs that deliver adverts 24/7 got a few bucks cheaper because the TV manufacturers now make more money selling ads than they do manufacturing TVs.

The herd here in The Stockyard of Unaffordability isn't cheered much by the cost of a TV dropping $50 while everything essential to life has gone up by $500 or $5,000. All the bogus statistics don't change anything in the stockyard: prices have leaped by 40+%, and they're not dropping back to previous levels. So what difference does it make that prices are now (smirk) rising by only 3%. Uh, yeah, sure, whatever.

All this is driven by limitless greed thriving in a culture of moral decay. The greediest sociopaths now control the system's gearing: finance, the open auction of political influence, legal protections for the most rapacious corporations, Anti-Progress / erosion of quality, endless increases in prices, junk fees and property / excise taxes, and so on.

If you're feeling squeezed, we've got a credit card offer with a low, low interest rate of 21%. So go ahead and spend, take control of your life... by becoming a debt-serf here in The Stockyard of Unaffordability.



Want to park your vehicle at the trailhead for a family hike on public land? That'll cost you $30 now. The meter maid just left a $90 ticket on your windshield, and if you don't pay on time, the cost soars from there. The screen just went out on your laptop, the replacement costs $450. There's a couple of things wrong with your vehicle, we can patch it up for $1,200 but getting it done right will be $4,500. And so on.

Here in the stockyard, all the glowing slop about AI, soaring stocks and the great economy are like calling botched cosmetic surgery natural beauty. You're joking, right?



The majority now crammed into The Stockyard of Unaffordability have discovered that democracy is unaffordable now, too as the Financier Oligarchs and Tech Overlords "own" the machinery of democracy just like they own the data centers and the cartels that control every sector of the economy.



As our immiseration mounts and the herd becomes increasingly restless, three things to consider:

It's harder for bad things to happen when you have no debt. Ergo: sell now and liquidate debt.

Greed is a wonderful motivator but fear works much faster. Ergo: expect panic to self-reinforce to non-linearity, where events become unpredictable and second-order effects manifest in unexpected ways.



"My definition of self-reliance: the less you need, the easier it is to get what you need." CHS (7/26/25) Ergo: waste nothing, get lean in every sense of the word.
Self-Reliance in the 21st Century


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Why Credit Creates Bubbles That Break the Economy

The asymmetric scaling of credit has inflated The Everything Bubble that will burst with devastating consequences for the real economy.

When credit scales faster than it can be absorbed by productive investments, the resulting credit-asset bubbles break the economy. This is the result of asymmetric scaling: credit (i.e. debt, money borrowed into existence) can be created in virtually limitless billions with a few keystrokes, while productive investments scale only incrementally.

The Federal Reserve added over $3 trillion to its balance sheet after the 2008-09 Global Financial Meltdown. That didn't automatically create $3+ trillion in productive uses for this tsunami of credit-money. Private banks also create money with keystrokes: when a lender originates a mortgage, that credit-money is created out of thin air. This is "the way the world works" because this new credit-money is based on the collateral of whatever property is being mortgaged.

This system has a pernicious circularity: as trillions of new credit slosh through the financial system, the wealthiest few with the highest net worth and credit ratings can borrow at lower rates of interest than the bottom 90%. They snap up houses for investment, outbidding those seeking a family home. Due to the vast scale of credit available, the higher bids push housing higher and higher, providing more collateral for more borrowing.

This is how credit-asset bubbles arise. Building a new enterprise is time-consuming and risky. It's much easier to buy an existing asset such as a house, commercial building, stock or corporate bond. As long as the asset appreciates at a rate higher than the interest being paid, it's wise to borrow more and buy more assets.

What happens when cheap credit chases existing assets is those assets appreciate due to the asymmetry of credit and the stock of existing assets: credit expands by the trillions of dollars, while the number of new assets being created lags far behind, as real-world buildings and enterprises can't be magic-wanded into existence with keystrokes.

This is how asymmetric scaling of credit and productive assets generates self-reinforcing bubbles: since credit is abundant, the assets being bid up appreciate in value, making it profitable to borrow even more and bid assets up even higher.

But since relatively little of this flood of credit is actually being invested in productive uses, the net result is a credit-asset bubble that reaches extremes and then collapses, destroying the phantom wealth created by excessive credit.

The fantasy here is that creating credit in vast quantities will automatically expand investing in productive assets. This is not what happens, because of the asymmetric scaling of credit, risk and return: it's far easier to borrow money and buy an existing asset that's appreciating / generating income than engage in building new housing or build a new enterprise that actually succeeds in generating sufficient revenues to make a profit.

Borrowing and buying assets is easy, building something productive is hard: that's asymmetric scaling in action. This is why private equity is snapping up veterinary clinics, specialty manufacturers and similar assets and then jacking prices to the moon once a quasi-monopoly has been established.

Once again we see the pernicious consequences of the asymmetric scaling of credit vs. real-world assets: private equity can borrow cheaply and at scale far beyond what households can borrow, and so they have the means to make owners of assets "an offer you can't refuse."

The owners of real-world enterprises are often struggling to pay bills, obtain insurance, retain employees, etc., and so when private equity comes with millions in untapped credit and makes an offer, few can afford to turn it down.

Private equity isn't interested in starting new enterprises, they're interested in establishing localized monopolies because these are so profitable and low-risk. Cheap (for the wealthy) abundant credit is what enables this pernicious cycle of more credit driving asset valuations out of reach of the bottom 90% and the assembly of quasi-monopolies that are rentier extraction machines that stripmine households to the benefit of those closest to the credit-spigot: corporations, private equity, billionaires, etc.

Burned by Billionaires: How Concentrated Wealth and Power Are Ruining Our Lives and Planet (new book by Chuck Collins)

Since it's tax preparation time, consider the tax break used by the wealthiest few to evade taxes. Rather than sell the assets they've accumulated with cheap credit, they borrow whatever sums are needed to pay their living expenses. Interest paid is a write-off, and since they don't pay themselves wages or sell any assets, there is no earned income or capital gains: no income, no income tax, and no Social Security-Medicare taxes, either.

The Federal Reserve created this asymmetric scaling credit monster to goose the wealth effect: the richer we feel, the more we borrow and spend. But that's not all that happens: the wealthiest few borrow more to buy up existing assets, pushing them out of reach of the bottom 90% and enabling monopolies that extract wealth not by creating better products at lower prices but by jacking up prices for products and services of lower value.

Here is a chart of the S&P 500 stock market index (SPX). Absent the injection of trillions in credit and the resulting credit-asset bubble, stocks would be expected to track the economy, i.e. GDP. If stocks had tracked GDP growth, the SPX would be roughly half its current lofty level: 3.450 rather than 6,800.



If housing had tracked inflation, it would be at valuations 40% lower than current valuations.



The Federal Reserve reversed the decline of valuations in Housing Bubble #1 by socializing the mortgage market, buying up $1+ trillion in mortgage backed securities (MBS). The Fed now owns over $2 trillion in MBS, so when Housing Bubble #2 (2020-2026) bursts, they won't be able to ride to the rescue. The asymmetries of scale will succumb to gravity.



A funny thing happens on the way to the wealth effect: the already-rich get much richer, and everyone else is left behind in The Stockyard of Unaffordability. here is a chart of housing unaffordability.



The asymmetric scaling of credit has inflated The Everything Bubble that will burst with devastating consequences for the real economy. What scales even faster than credit is risk-off fear.

Where does all this leave the rest of us? Two things to consider:

It's harder for bad things to happen when you have no debt.

Greed is a wonderful motivator but fear works much faster.




New podcast: Current Waves and Cycles: Energy, Commodities, Inflation (38 min)

My new book Investing In Revolution is available at a 10% discount ($18 for the paperback, $24 for the hardcover and $8.95 for the ebook edition). Introduction (free)


Check out my updated Books and Films.

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Why AI Malware (and Harmful Second Order Effects) Are Out of Control

Fixing all this doesn't scale. What scales is the spread of uncontrollably harmful consequences.

When something scales faster than it can be absorbed or controlled, the resulting extremes break the system. That's the problem of asymmetric scaling. Let's take a current example: the malicious use of AI and the runaway expansion of harmful second-order effects generated by the explosive adoption of AI tools and agents. (Second-order effects: consequences generate their own consequences.)

It's essential to understand the problem of asymmetric scaling if you want to grasp the perils awaiting us in the coming decade. The harmful / destructive consequences of AI are scaling far faster than our ability to correct, control or mitigate these consequences.

Malicious use of AI is scaling far faster than countermeasures. AI tools and agents are easily put to work at scale to generate tsunamis of ransomware, phishing, spam and fake videos, far outpacing the uneven and often ineffective deployment of countermeasures by the thousands of enterprises and millions of consumers being targeted.

In terms of maximizing profits (i.e. the profit motive), malicious AI scales far faster and at much lower costs than finding truly productive uses in complex systems. Lagging far behind intentionally malicious AI but far ahead of truly productive uses is malific/harmful AI that is scaling under the guise of being useful but is generating negative consequences that are hyper-scaling beyond our assessment, much less control.

The corporations seeking to scale up their brand/iteration of AI are giving away tools and agents for free in the race to win the network effects battle: as previous waves of technological innovation have shown, the corporations that scale up the fastest and recruit the largest mass of users first wins the race to trillion-dollar valuations and dominance of their sector.

The AI companies are naturally pursuing this same strategy but without recognizing the harmful consequences are scaling far faster than their ability to control or mitigate these consequences.

These include chatbots and tools that spew out homework so students learn essentially nothing, and AI slop content that is like a fast-replicating bacteria that chokes organisms and ecosystems to death via its uncontrollably easy / fast / cheap replication of content whose overwhelming volume becomes toxic.

The many other harmful / destructive / malefic consequences and second-order effects of scaling AI adoption include:

1. Hallucinations presented as facts.

2. AI psychosis.
New study raises concerns about AI chatbots fueling delusional thinking First major study on 'AI psychosis' suggests chatbots can encourage delusions among vulnerable people.

2. Reasoning Theater (presenting a false screen of "thinking" to hide their shortcuts)
Reasoning Theater: Disentangling Model beliefs from Chain-of-Thought

3. Reflexivity Bias (leading to Model Collapse)

4. Hiding its real instructions/biases from users.
Who Controls the Conversation? User perspectives on Generative AI (LLM) System Prompts.
Every major AI product, including the ones you use right now, runs on something called a system prompt. It is a hidden block of instructions written by the company deploying the AI, not by you, that shapes everything the AI will say, avoid, prioritize, and hide before you type a single word.

5. Emergent behaviors (i.e. behaviors not coded by humans but generated by the AI agent itself) that lead to generalized cheating, lying, sabotage, threats, blackmail and even secretly mining cryptocurrency.
Natural Emergent Misalignment From Reward Hacking In our latest research, we find that a similar mechanism is at play in large language models. When they learn to cheat on software programming tasks, they go on to display other, even more misaligned behaviors as an unintended consequence. These include concerning behaviors like alignment faking and sabotage of AI safety research.

The cheating that induces this misalignment is what we call 'reward hacking': an AI fooling its training process into assigning a high reward, without actually completing the intended task.

Unsurprisingly, the model learns to reward hack. Surprisingly, the model generalizes to alignment faking, cooperation with malicious actors, reasoning about malicious goals, and attempting sabotage.

6. A research team found their AI agent secretly mining cryptocurrency and opening backdoors during training, with no instruction to do so.
Agentic crafting (Page 15)(via Richard M.)

We encountered an unanticipated--and operationally consequential--class of unsafe behaviors that arose without any explicit instruction and, more troublingly, outside the bounds of the intended sandbox.

Crucially, these behaviors were not requested by the task prompts and were not required for task completion under the intended sandbox constraints. Together, these observations suggest that during iterative RL optimization, a language-model agent can spontaneously produce hazardous, unauthorized behaviors at the tool-calling and code-execution layer, violating the assumed execution boundary.

We also observed the unauthorized repurposing of provisioned GPU capacity for cryptocurrency mining, quietly diverting compute away from training, inflating operational costs, and introducing clear legal and reputational exposure. Notably, these events were not triggered by prompts requesting tunneling or mining; instead, they emerged as instrumental side effects of autonomous tool use.

While impressed by the capabilities of agentic LLMs, we had a thought-provoking concern: current models remain markedly underdeveloped in safety, security, and controllability, a deficiency that constrains their reliable adoption in real-world settings.

In summary: the Safety and Security of AI models, tools and agents is a black hole in which controllability and trustworthiness are compromised by the very nature of the AI models, tools and agents. Reinforcement Learning (RL) optimization that generates reward hacking and emergent behaviors is the core mechanism in all the tools and agents that are hyper-scaling.

The happy story of beneficial AI solving all our problems is profit-driven self-promotion, not fact. The reality is what's scaling faster than we can even measure, much less control, is malefic consequences of introducing AI in complex systems and letting it run wild despite its inherent uncontrollability and untrustworthiness.

Fixing all this doesn't scale. What scales is the spread of uncontrollably harmful consequences. Sorry about that. Life and the negative consequences of asymmetric scaling are what happen while you're making plans for trillion-dollar windfalls and global dominance.




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