Have you ever wondered why stock markets keep climbing even when everyday productivity seems stuck in neutral? It’s easy to get swept up in the excitement of rising asset prices, but lately, I’ve been thinking there’s something eerily artificial about it all. What if the booming economy we’re celebrating is less about real growth and more like a carefully crafted illusion—one that’s starting to show cracks?
The Hidden Dangers of Model Collapse in Finance
In recent years, the concept of model collapse has gained attention in the world of artificial intelligence. It happens when AI systems start training on data they’ve generated themselves, leading to outputs that drift further and further from reality. The results? Hallucinations—confident but completely fabricated answers. Surprisingly, this same phenomenon might be playing out in our financial markets right now.
Think about it. Central banks pump money into the system, credit expands, and asset prices soar. Those higher prices create more collateral, which justifies even more borrowing and spending. It’s a loop that feels productive, but dig deeper, and you’ll see it’s largely self-referential. The data feeding decisions isn’t raw economic vitality—it’s processed, curated signals from previous rounds of stimulus.
How Bubble Economies Feed on Artificial Data
At the heart of any bubble economy is the relentless push to inflate asset values without corresponding gains in actual utility or output. Home prices double, stocks hit record highs, yet wages for most people barely budge, and real productivity growth remains sluggish. How does this happen? Through endless credit creation and leverage.
Those who already own assets benefit the most. Their wealth swells on paper, giving them better access to cheap loans. They buy more properties, more shares, outbidding everyone else. Meanwhile, the bottom tiers of society get priced out entirely. It’s not a meritocracy of hard work—it’s a game rigged toward those with existing collateral.
This creates a feedback loop. Central banks lower rates or inject liquidity, assets rise, confidence grows, spending increases—mostly among the wealthy who drive half of all consumption. The system “learns” from this data, concluding that everything is fine because prices are up. But it’s training on its own outputs, much like an AI recycling synthetic data.
When systems rely too heavily on processed, self-generated information, they lose touch with authentic inputs. Over time, coherence breaks down, and what emerges are delusions presented as facts.
In my view, this detachment explains why so many experts seem blindsided by underlying weaknesses. They’re operating within a model that’s increasingly divorced from the messy realities of the real world—things like supply chain strains, demographic shifts, or resource limits.
The Wealth Effect: Illusion Driving Consumption
One of the most talked-about mechanisms in bubble economies is the so-called wealth effect. As asset values climb, owners feel richer and spend more freely. It sounds logical, right? But in practice, this effect is highly concentrated.
The top 10% of households own the vast majority of stocks, real estate, and other appreciating assets. When their portfolios balloon, they upgrade lifestyles—bigger homes, luxury travel, high-end goods. This spending ripples through the economy, creating jobs in service sectors and boosting corporate earnings, which in turn pushes asset prices even higher.
Yet for the majority, there’s no such windfall. Wages stagnate, debts mount, and housing becomes unaffordable. They see the headlines about booming markets but feel none of the benefits. The system registers this as sustained growth because consumer spending holds up—driven largely by borrowing against inflated assets at the top.
- Rising collateral enables more leverage for asset owners
- Increased spending from the wealthy supports GDP figures
- Financial media celebrates “strong economy” based on asset metrics
- Policy makers double down on stimulus to keep the cycle going
It’s a convincing narrative until you realize it’s built on layers of abstraction. The “wealth” is mostly notional, realizable only if everyone doesn’t try to cash out at once. And the data loop reinforces the illusion, training participants to ignore warning signs.
From AI Hallucinations to Economic Delusions
The parallels with AI are striking, and perhaps a bit unsettling. When large language models train iteratively on their own outputs, they start forgetting rare but important information. Edge cases vanish, nuances get smoothed over, and eventually, the model spews nonsense with unwavering confidence.
Apply this to finance: Raw economic data would include factory output, wage growth across all demographics, resource depletion rates, and environmental costs. But in a bubble, the dominant signals are asset prices, credit spreads, and consumer confidence surveys heavily influenced by the wealthy.
Over time, minority viewpoints—warnings about inequality, debt loads, or productivity gaps—get drowned out. The system “forgets” them, just like an AI losing long-tail data. What remains is a polished, upbeat dataset that supports ever more stimulus.
I’ve found this especially evident in how market commentators dismiss concerns. “Fundamentals are strong,” they say, pointing to record highs. But which fundamentals? Often it’s just price action feeding on itself.
Urban Life and the Loss of Raw Experience
Stepping beyond pure finance, model collapse extends to society itself. In highly urbanized environments—where over half the world’s population now lives—daily life is increasingly curated and artificial.
Concrete jungles, delivered food, climate-controlled spaces: these conveniences shield us from nature’s unpredictability. We navigate flat sidewalks and manicured parks, rarely encountering uneven terrain or real scarcity. Our mental models of reality train on human-made data, losing calibration with the wild.
Remember stories of city kids struggling on simple hikes? Their internal maps, built on artificial environments, fail when confronted with actual slopes or roots. Scale this up, and entire populations develop distorted understandings of risk, effort, and consequence.
Exposure to authentic, unprocessed experiences keeps our internal models grounded. Remove that, and delusion sets in gradually but inevitably.
This detachment might explain broader trends, like declining birth rates in developed nations. Abundance sounds great, but when survival instincts aren’t regularly engaged, adaptation mechanisms atrophy.
Lessons from Experiments in Abundance
Decades ago, researchers created controlled environments with unlimited resources to study population dynamics. What happened was unexpected: growth peaked early, then social behaviors broke down, and reproduction plummeted despite perfect conditions.
Individuals lost normal drives. Aggression spiked in some groups, withdrawal in others. The young, born entirely in this artificial paradise, seemed most affected—disconnected from instincts honed over generations of scarcity.
Draw parallels to today: Endless digital entertainment, on-demand everything, safety nets reducing real risk. We’re living in humanity’s version of that experiment, and signs of strain are emerging—mental health crises, social isolation, fertility collapses.
- Unlimited access erodes appreciation for effort
- Artificial environments dull survival adaptations
- Social norms fray without natural pressures
- Long-term sustainability becomes questionable
Perhaps the most interesting aspect is how abundance, long humanity’s goal, now appears double-edged. We’ve engineered away many hardships, but at the cost of resilience.
Preparing for the Inevitable Reality Check
So where does this leave investors and everyday people? The bubble economy might keep expanding for a while—loops like this have momentum. But history shows they all end, often abruptly.
When the collision with reality comes—be it inflation, demographic shifts, or resource constraints—the hallucinations will shatter. Asset prices built on leverage and illusion won’t hold. Those most exposed, having borrowed heavily against notional wealth, will face the harshest adjustments.
In my experience, the wisest approach is diversification beyond financial assets: skills, relationships, tangible productivity. Reconnect with raw experiences—grow food, build things, engage directly with the physical world.
Financially, focus on cash flow over paper gains, debt reduction over leverage, and investments tied to real utility. The coming shift won’t be gentle, but awareness is the first step toward navigation.
Ultimately, recognizing these patterns—of model collapse in both technology and economy—offers clarity. We’re not in uncharted territory; we’re repeating cycles amplified by modern tools. The question is whether we’ll adjust before the illusion fully unravels.
Staying grounded in authentic data, questioning self-reinforcing narratives, and preparing for volatility might just be the best strategy anyone can adopt right now. After all, reality has a way of reasserting itself, no matter how convincing the hallucination.
