It’s All One Bubble
America’s bubble economy has been hiding its economic weaknesses. What happens when it pops?
“The market feels toppy,” wrote the Wall Street Journal’s James Mackintosh back in December. With the AI bubble now on increasingly shaky ground post-DeepSeek, it seems credible that a correction is coming.
But while AI clearly is a big driver of the market right now — it has been a dramatic boon to the world’s largest companies — AI doesn’t capture the extent of the mania: Meme coins are raging, gold is on a tear, and even real estate prices remain robust. Everything seems to be soaring.
There are microeconomic explanations for what’s going on: In business cycles, expectations for revenues and profits tend to get ahead of reality, a process that is often gradual. Markets “correct” (go down) when these expectations are updated, and these corrections can be sharp. These cycles can happen within certain sectors or in the economy more broadly.
When the last bubble popped in late 2021, there was a simple, relatively consensus explanation for why the bubble grew to such immense proportions: Low interest rates had unleashed investors’ animal spirits and the euphoria had gone too far. This time around — with interest rates already elevated and inflation cooling — there is no such simple explanation. If we’re in another bubble, this one has deeper root causes.
This essay will explore a theory: We are living through an “Age of Bubbles” and that these bubbles are hiding America’s deep economic weaknesses. I explain how “bubble hopping” has altered investor behavior, and why today’s bubble may be a manifestation of this pattern. Building on the writing of five different thinkers, I will explain how the Dot-com bubble, the 2008 financial crisis, the 2021 tech bubble, and our current bubble (whatever it ends up being called), can be viewed as one, big bubble.
If this hypothesis is true, it may explain why so many people feel like our economy isn’t doing well, even as the stock market continues to move upwards.
The Age of Bubbles & the Return of Depression Economics (Paul Krugman)
This theory has its roots in an argument that Nobel-prize winning economist Paul Krugman made in his 2008 book, Return of Depression Economics. He is focused on the 2008 financial crisis, but I’ll explain how the behavior he describes may have become a recurring economic pattern. Here is what he says about the post-Dot-com recovery:
Cynics said that Greenspan [the Fed chairman] had succeeded only by replacing the stock bubble with a housing bubble. And they were right…The Fed was barely able to pull the economy out of its post stock bubble slump, and even then, it was able to do so only because it was lucky enough to have another bubble come along at the right time. Would the Fed be able to pull off the feat again?
Krugman doesn’t use this phrase, but he introduces the idea of bubble hopping — that when a bubble pops, a new bubble can serve as a “bailout” for the economy, leading to a chain of bubbles. This is a very different fact pattern than what macroeconomics would usually predict.
Here’s a typical macroeconomic explanation of bubbles: In a bubble economy, excess money is sloshing around. For example, in the 2008 housing crisis, people thought they were rich because of their home equity. During a crash, this money disappears — prices come down and everyone re-calculates their net worth. As fear sets in, people try to convert their assets into cash. Because everyone wants cash, interest rates go up — interest rates are how much you need to pay people to lend you their cash. Higher interest rates lead to less business investment, which leads to unemployment. This becomes a vicious cycle. John Maynard Keynes, the father of modern macroeconomics, called this a “liquidity trap.”
While the government can and often does print money to alleviate these crises — this was the recommendation popularized by Keynes — the recovery process is often drawn out and undesirable. Eventually, the economy returns to its real, long-run potential, but this is usually a significantly lower level of economic output than during the boom.
What Krugman saw in 2008 was that in fact something quite different had happened after the Dot-com bubble popped. Monetary policy, usually the solution to crashes, was not working. Instead, the thing that got the economy out of its Dot-com funk was a new bubble. After a few years of sluggishness, people got excited about real estate, investors started pouring money into houses, and people felt rich again. This led to more spending, more business investment, and the party got started again. Instead of a government bailout, the economy got a bubble bailout.
Sitting in 2025, seventeen years after Krugman published this explanation, it seems to me that his thesis is a profoundly relevant narrative for our current times. Has bubble hopping convinced investors to suspend their preference for cash during crashes? Is it possible that now, when one bubble crashes, investors simply look for the next bubble to plow their money into? And what happens when this bubble chain reaction eventually implodes on itself?
The Everything Bubble (Edward Chancellor)
Edward Chancellor touches on the idea of a brewing mega-bubble in his 2022 book The Price of Time. He argues that chronic mismanagement by central banks — too much intervention, too much reliance on printing money, too much reliance on zero interest rates — has resulted in an “Everything Bubble,” distorting the economy. 1
Chancellor focuses primarily on cheap money as the root cause of the problem. For Wall Street, two decades of near zero interest rates has encouraged speculation, sending asset prices ever upwards. But for the real economy, low interest rates have created economic stagnation. In Chancellor’s telling, this is because interest rates are related to the growth rate of the economy: When interest rates are 5%, only projects that generate 5%+ returns get funded; when interest rates are 0%, anything with a positive expectation gets funded.2 Thus, low interest rates lead capital to be allocated to worse projects. Additionally, instead of weak companies dying and being replaced by stronger ones, weak companies become “zombies,” half-alive and half-dead, draining the economy of talent and resources that would usually move to better companies.3
The result of this cheap money regime, according to Chancellor, is that Wall Street and Main Street have diverged. The stock-owning class gets richer and richer (remember, close to half of American households still don’t own stocks), because speculation benefits existing asset owners. Because low return projects are being pursued, wages and gross domestic product (a measure of goods and services production) progress glacially. This has contributed to income inequality, social upheaval, and the new meme stock phenomenon.
Secular Stagnation (Larry Summers)
The financial mania of the Everything Bubble has not translated into the real economy. This is an idea that leading economist Larry Summers — a former Treasury Secretary and Harvard president — has emphasized over the years.
In a recent interview with Bari Weiss, Summers pointed out:
We have a larger and larger number of people who are estranged from our economy. In 1960, 5% of men were not working between the ages of 25 and 54. Today, Bari, that number, is more like 15%. If 15% of men are not working at any point of time, then a quarter of the people will have been out of work for a year or more over a 4-5 year period. And that’s destructive of the economy’s productive potential, it's destructive for their families, it’s destructive for the areas where they live, and it’s destructive for the moral fabric of our national life.
Summers’ broader theory is known as “secular stagnation.” In a 2016 essay on the topic, he tried to understand why the economy isn’t growing faster. He suggested three reasons for the slowdown: 1) A savings glut relative to new investment, which leads to financial bubbles by inflating the prices of existing assets, 2) Low productivity growth relative to the golden age of 1870 to 1970, and 3) The “new economy” requiring low capital investment (e.g., Google and Apple who are “awash in cash”).
Venture capitalist Peter Thiel, another strong proponent of the secular stagnation hypothesis, put it more succinctly: “We were promised flying cars and all we got is 140 characters.”
The Great Globalization Boom (Peter Thiel):
It’s not just innovation that’s slowing down, according to Thiel, but globalization as well.
One of the biggest contributors to quality-of-life gains for most Americans over the last 70 years has been cheap goods imported from abroad, subsidized by low cost labor. Thiel sees globalization as being the ultimate force for economic good. When globalization increases — as it did in the post-WWII period — prosperity ensues. When it ends — which last happened in 1913 after the Gilded Age — war occurs.
Thiel makes this case forcefully in his 2008 essay, “The Optimistic Thought Experiment.” He writes:
For the past three centuries, the great rises and falls of the West track the high and low points of the hope for globalization. And whether by cause or effect or both, the abstract hopes of a global order also are mirrored in the virtual world of money and finance. The rises and falls of the globalizing West have been tracked by the peaks and valleys of the stock market. Almost every financial bubble has involved nothing more nor less than a serious miscalculation about the true probability of successful globalization.
As deglobalization begins — and President Donald Trump’s second term seems to be a very clear move in that direction — real risks lie ahead.
The End of Pax Americana & the Debt Supercycle (Ray Dalio):
Ray Dalio, the famous macro investor and founder of Bridgewater, takes these ideas to their logical extremes in his book Principles for Dealing with the Changing World Order.
Dalio combines monetary policy and geopolitics in a single theory, which he calls the “Debt Supercycle.” Using the Dutch and British empires as examples, he argues that debt supercycles follow three phases: First, during the rise of an empire, there are high interest rates. Once the nation becomes dominant, its currency becomes the global reserve currency, leading to low interest rates. Access to cheap debt leads to excess borrowing and profligacy, which ultimately results in the failure of the empire and the loss of reserve currency status.
Looking at today’s macro situation, Dalio argues that we are now at the end of the American empire, what some have called “Pax Americana,” a period of peace and prosperity during which America was the only true global superpower. Dalio makes three predictions: 1) High inflation, 2) Civil unrest, and 3) Increased geopolitical conflict.
Conclusion
We seem to be living in a bubble economy, where each bubble that pops gives way to a new one. This is what Paul Krugman first saw in 2008 — and this is what has continued to happen in the seventeen years since.
It's possible that the latest bubble – AI – will turn out not to be a bubble at all. Many people are betting that the hundreds of billions in investment will unleash trillions of dollars of growth. They see AI reinventing our economy — with AI agents doing knowledge work, robots automating manufacturing, and large models unleashing new drugs to cure diseases. Some even predict new government entitlements will be needed to distribute all this new wealth.4
And if AI doesn’t fulfill this promise?
It’s possible that a modest correction would happen — only to be followed by another bubble in some other asset class.
But this cycle can’t last forever. With “Pax Americana” ending, geopolitical competition is back. Eventually, and possibly very soon, we’re going to have to reckon with the real economic weaknesses that the bubble economy has been hiding.
Rather than “taking away the punch bowl just as the party gets going,” the Fed has encouraged risk taking by cutting rates whenever the market wavers. This is known as the “Fed put.”
There is debate among economists about the direction of causality — whether low growth leads to low interest rates or whether low interest rates lead to low growth.
Austrian economist Joseph Schumpeter called this force “creative destruction” and described it as “the essential fact about capitalism.” He argued that this was a big part of why capitalism won out over socialism.
Others worry AI will become so powerful, it will subjugate the human race.