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Model Collapse: The Entire Bubble Economy Is a Hallucination December 3, 2025
The conclusion that soaring asset prices mean the economy is strong is a hallucination that goes unrecognized because the entire financial system is hallucinating.
Consider the data that the financial sector bases conclusions / decisions on (i.e. the data that the financial sector "trains" on) in a Bubble Economy like the present. The Bubble Economy's core goal is to inflate the valuation of assets not by increasing utility-value or productivity but by artificially expanding credit and leverage. This benefits those who already own assets, as their collateral (i.e. "wealth") expands without any effort, and this swelling collateral enables them to borrow money to buy more assets. This also benefits those with high incomes and modest debt, as these boost their credit rating, enabling them to borrow at lower rates than the bottom 90% of the workforce--credit they can use to outbid the bottom 90% to snap up assets which are soaring in value. This Bubble Economy dynamic is a self-reinforcing series of iterations: the central bank expands credit and leverage, goosing asset prices higher, which boosts the collateral foundation for further credit expansion. This flood-tide of credit flows to those whose assets are generating more collateral, enabling them to buy more assets and outbid the less creditworthy while also increasing their consumer spending. Since the top 10% own most of the assets bubbling higher, this "wealth effect" is concentrated in the top 10%, who account for roughly 50% of all consumer spending. The Bubble Economy financial system uses this self-referential data to "train" its responses and conclusions. This is analogous to the way that AI systems "train" on data they generated in previous iterations. This leads to the topic of Model Collapse, the degradation of AI's output (answers) when it starts training on its own curated output rather than raw data. This then leads to a provocative Unified Theory of Model Collapse (via Tom D.), which posits that model collapse is not limited to AI, it applies equally well to humans, mice and pretty much every other system. The basic idea is that raw, unadulterated data--"in the wild" data that hasn't been "cooked," curated or massaged--is the foundation of model stability and utility. We can call this authentic data, as it includes outliers, conflicting data points, ambiguous readings and all the messiness of the real world. Once the "raw" data has been "cooked" (channeling French anthropologist Claude Levi-Strauss), its authenticity is lost and the "cooked" / curated / processed data is increasingly artificial. Each iteration of curating / processing data further distances the new output from "raw" / authentic data. Over time, the coherence and meaning of the output is degraded to the point at AI generates hallucinations that are presented as "accurate answers." This is the dynamic I describe in my book Ultra-Processed Life: the substitution of authenticity with artifice leads to system collapse, not just in the digital realm but in the realm of human experience. As artifice--data and models drawn from "cooked," curated, massaged, processed sources--replaces "raw" authenticity, entire populations and systems start hallucinating while believing the artificial model is "real." In this state of delusion, they believe their hallucinations are reflecting "the real world": they're blind to the distance between the Ultra-Processed Life they accept as "real" (i.e. "raw") and the actual raw real world. In this state, the conclusions / answers provided by both AI and humans are hallucinations that are presented as "fact." Those who have lost touch with "raw" real world data then accept these hallucinations as "fact" until the inevitable collision with reality. The conclusion that soaring asset prices mean the economy is strong and so all is well is a hallucination that goes unrecognized because the entire financial system is hallucinating because it's "training" on artificial data that it generated in a self-referential feedback loop of artificial stimulus and the resulting rise in asset valuations and spending. That none of this stimulus boosted utility value or productivity is left out of the "training," which focuses solely on curated data that supports the hallucination. Here is how the author of the Unified Theory of Model Collapse describes this process: "Training on AI-generated data causes models to hallucinate, become delusional, and deviate from reality to the point where they're no longer useful: i.e., Model Collapse. The more 'poisoned' the data is with artificial content, the more quickly an AI model collapses as minority data is forgotten or lost. The majority of data becomes corrupted, and long-tail statistical data distributions are either ignored or replaced with nonsense. Those models lose the capacity to understand long-tail information (improbable, but important data) that is no longer represented. Information on topics like serious injuries, getting punched in the nose, how dangerous wild animals can be, and what it's like to truly be hungry because you can't find food. Their models default to synthetic human artifice instead of understanding real implications. 
The proposed thesis is that AI models, human minds, larger human cultures, and our furry little friends, all train on available data. Brains (or brain regions) undergo model collapse just like AI systems. They become unable to reference reality, they become delusional, and hallucinate things that make no sense. Hence, the 'Why do we need farmers when food just comes from the store' level of disconnection observed in urban populations. In a heavily urban setting, humans train on 'data sets' that are nearly wholly artificial. The less time spent outside, the less time spent interacting with the real physical world around them, the less accurate their model of reality becomes. A rocky slope up a hill may be 100% real, a grass playing field may be 70% real, and a concrete sidewalk may be around 40% real. At some point, however, the 'salted' artificial data is sufficient to corrupt the real-world knowledge of individuals and cause model collapse. I am reminded of an anecdote from when I was a child. A cousin came to play with my siblings and I. My family had been raised going camping and hiking and wandering the wilds since before I can remember. Somewhere around age 3 or 4, our cousin came to visit and we went cruising up a hill hiking with our fathers in tow. This cousin, however, had grown up in a suburban hellhole where everything was artificial. As such, he found it nearly impossible to navigate a sloped hill. His experience with walking and running had only ever consisted of flat, soft, curated environments produced by other people. He had no experience, or ability, in navigating a dirt trail at a 20 degree incline. His neurological model of the world was trained on human-produced data, and could not function when confronted with reality. The universal thesis for model collapse is that advanced modeling systems, when trained on information produced by entities of their own class, lose information fidelity inter-generationally. After multiple generations of training on poisoned datasets, the models themselves become delusional, hallucinate false information, and cease to function. In the same way that AI models become delusional and hallucinate when too much AI-generated data is in the training dataset, humans also become delusional when too much human-generated data is in their training dataset." The author then applies this to the famous Mouse Utopia experiment of John Calhoun, in which a handful of breeding-pair mice were put in a large artificial "world" with unlimited food and water and space for 6,000 mice. The researchers anticipated the mice would proliferate to the maximum limit of 6,000 and then experience some version of population overshoot. But this isn't what happened. The mice population reached 2,200 and then collapsed as anti-social behaviors exploded and reproduction ceased. A wide variety of causal factors have been posited and discussed over the decades since the 1962-72 experiments. The Unified Theory of Model Collapse suggests the core causal mechanism is the mice born in this artificial world of endless abundance "trained" on increasingly artificial data and this disconnect from "raw" real-world experience deranged not just individual mice but the entire society of the artificial world of abundance in a crowded, artificial "urban" environment. The author suggests the current human population has reached the urban population density (roughly 60% of humanity lives in urban settings) that triggers anti-social behaviors and a rapid decline in fertility / reproduction. Many explanations for the current sharp decline in birth rates in most developed-world economies have been offered, and the Unified Theory of Model Collapse shed important light on the causal mechanisms of artificial environments and abundance. In my latest book, Investing in Revolution, I explore this irony of abundance: since abundance was only temporary for 99% of humanity's existence, an artificial world of abundance degrades our core survival mechanisms of adaptation to the point that we've lost the capacity to adapt that was kept sharp by scarcity and daily exposure to authentic experiences. Ultra-Processed Life is artificial because the entire point is to replace messy authentic experiences with convenience and abundance. Just as AI programs cannot differentiate between "facts" and hallucinations, advanced economies /societies cannot recognize or explain their derangement because the implicit goal of Progress is to replace authentic experiences in the "raw" real world with artificial (and highly profitable) convenience and abundance. The conclusion here is striking: the entirety of the modern world of Progress--urbanized, detached from the "raw" real world in service of convenience and abundance, a world where we "train" our mental models on "cooked," curated, processed artifices--is all a vast, inter-connected, self-reinforcing hallucination bound for a collision with an inconveniently "raw" real world. The Bubble Economy will be the first point of contact. Prepare accordingly. AI models collapse when trained on recursively generated data (nature.com) 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. Become a $3/month patron of my work via patreon.com Subscribe to my Substack for free My recent books: Disclosure: As an Amazon Associate I earn from qualifying purchases originated via links to Amazon products on this site. THE REVOLUTION TRILOGY: Investing In Revolution Ultra-Processed Life The Mythology of Progress Systemic Problems/Solutions Investing In Revolution (2025) Introduction (free) The Mythology of Progress (2024) Introduction (free) Global Crisis, National Renewal (2021) Introduction (free) Money and Work Unchained (2017) Introduction (free) A Radically Beneficial World (2015) Introduction (free) What You Can Do Yourself Ultra-Processed Life (2025) Introduction (free) Self-Reliance in the 21st Century (2022) Introduction (free) When You Can't Go On: Burnout, Reckoning and Renewal (2022) Introduction (free) Get a Job, Build a Real Career and Defy a Bewildering Economy (2014) Intro (free) Novels The Adventures of the Consulting Philosopher Intro (free) The Secret Life of an Asian Heroine First chapters (free) Become a $3/month patron of my work via patreon.com. Subscribe to my Substack for free Investing In Revolution print $18, (Kindle $8.95, Hardcover $24 (145 pages, 2025) 
Only now do we see that we've been investing in revolution for decades--not the revolutions we thought we were investing in, revolutions in technology and finance, but in the social revolution made inevitable by the extremes that we've reached in our single-minded pursuit of private gains.
The pendulum that we've pushed to an extreme will swing to the opposite extreme, and the artifices that have propped up a facade a stability for decades will accelerate the disorder rather than reverse it. We now stand at the point of decision, and this book offers a path to a reformation and renewal that serves the shared interests of us all, not just the few. Introduction (free) Ultra-Processed Life print $16, (Kindle $7.95, audiobook, Hardcover $20 (129 pages, 2025) 
Ultra-Processed Life: the substitution of a synthetic, commoditized, very profitable facsimile for what was once authentic.
Ultra-Processed Life is my term for everything that is analogous to ultra-processed snacks: attractively marketed, instantly alluring, easy to consume, addictive by design, tasty in the moment but harmful over time, its origins a black box of unknown processes, the brightly colored product bearing no resemblance to the real-world ingredients, an idealized form of what is inherently imperfect, untethered from the natural world. As with many others, the catalyst for my exploration was a life-threatening medical crisis that did not have a specific cause. This led me to wonder if our entire way of life is like an ultra-processed snack: tasty but not healthy, edible but stripped of the nutrients we need to be healthy, addictive by design. Introduction (free) The Mythology of Progress, Anti-Progress and a Mythology for the 21st Century print $20, (Kindle $9.95, Hardcover $24 (215 pages, 2024) audiobook, Read the Introduction and first chapter for free (PDF) 
What if the policies to accelerate growth are no longer working because our fix for every problem--growth at any cost--is failing? We're told Progress is inevitable as a result of technology, but everyday life is getting harder, not easier--the opposite of Progress, what I call Anti-Progress.
What if the real source of the unraveling is far deeper than economics or politics? What if the problem is what we see as the inevitable destiny of humanity--Progress--is actually a modern mythology, disconnected from the real-world consequences of growth for growth's sake? We indignantly reject that Progress is a mythology, but our need for mythology hasn't gone away because we've mastered technology; we've created a modern mythology of technology that is heedless of its own consequences. To truly progress, we need a new mythology aligned to 21st century realities. Read the Introduction and first chapter for free
Recent entries: Model Collapse: The Entire Bubble Economy Is a Hallucination December 3, 2025 Why Healthcare Is in a Death Spiral: Follow the Money December 1, 2025 24 Things I'm Grateful For November 28, 2025 A Stoic's Thanksgiving Gratitude November 26, 2025 The Middle Class Is Cracking November 24, 2025 Is AI a Catalyst for Growth--or For Collapse? November 20, 2025 What We've Lost November 18, 2025 Inequality Then and Now: Now It's Too Late November 14, 2025 Did the "Solution" Solve the Problem, Or Did It Just Make Somebody Rich? November 11, 2025 The Risk of AI Isn't Skynet November 6, 2025
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"There is no security on this earth; there is only opportunity." (Douglas MacArthur) "We are what we repeatedly do." (Aristotle) "Do the thing and you shall have the power." (Ralph Waldo Emerson) "Any intelligent fool can make things bigger, more complex, and more violent. It takes a touch of genius and a lot of courage to move in the opposite direction." (E.F. Schumacher, via Tom R.) "He who will not risk cannot win." (John Paul Jones) "When we drink coffee, ideas march in like the army." (Honore de Balzac) "Progress is not possible without deviation." (Frank Zappa, via Richard Metzger) "Victory favors those who take pains." (amat victoria curam) "The man who has a garden and a library has everything." (Cicero, via Lee Bentley) "A healthy homecooked family meal and a home garden are revolutionary acts." (CHS) "Do you know what amazes me more than anything else? The impotence of force to organize anything." (Napoleon Bonaparte) "The way of the Tao is reversal" Or "Reversal is the movement of Tao." (Lao Tzu) "Chance favours the prepared mind." (Louis Pasteur) "Success consists of going from failure to failure without loss of enthusiasm." (Winston Churchill) "Where there is ruin, there is hope for treasures." (Rumi) "The realm of gratitude is boundless." (CHS, 11/25/15) "History doesn't have a reverse gear." (CHS, 12/22/15) Smith's Law of Conservation of Risk: Every sustained action has more than one consequence. Some consequences will appear positive for a time before revealing their destructive nature. Some consequences will be intended, some will not. Some will be foreseeable, some will not. Some will be controllable, some will not. Those that are unforeseen and uncontrollable will trigger waves of other unforeseen and uncontrollable consequences. (July 8, 2014)(thanks to Lew G. for retitling the idea.) Smith's Neofeudalism Principle #1: If the citizenry cannot replace a kleptocratic authoritarian government and/or limit the power of the financial Aristocracy at the ballot box, the nation is a democracy in name only. The Smith Corollary to Metcalfe's Law (The Network Effect): the value of the network is created not just by the number of connected devices/users but by the value of the information and knowledge shared by users in sub-networks and in the entire network. (CHS, 4/6/16) My Credo of Liberation: I no longer care if the power centers of our society--the distant, fortified castles of our financial feudal system--are changed by my actions, for I am liberated by the act of resistance. I am no longer complicit in perpetuating fraudulent feudalism and the pathology of concentrated power. I no longer covet signifiers of membership in the Upper Caste that serves the plutocracy. I am liberated from self-destructive consumerist-State financialization and the delusion that debt servitude and obedience to sociopathological Elites serve my self-interests. (Thank you, Klaus-Peter L., for reminding me) "We've become a culture of excuses rather than solutions: solutions always require sustained effort and discipline." (CHS 4/9/16) "Fraud as a way of life caters an extravagant banquet of consequences." (CHS 4/14/16) "Creativity = problem solving = value creation." (CHS 6/4/16) "Truth is powerful because it is the core dynamic of solving problems." (CHS 7/21/17) "We live in a system of human emotions that masquerades as a science (economics)." (CHS 1/1/18) "Always remember, your focus determines your reality." (George Lucas) "Diversity is for poor people. Sameness is for the successful." (GFB) "When power dissipates suddenly, it dissipates completely." (CHS 7/14/19) "Disobedience is the true foundation of liberty. The obedient must be slaves." (Henry David Thoreau) "Markets cannot price in the value of non-monetized natural assets such as diverse ecosystems." (CHS 7/14/19) "Magical thinking isn't optimism, it is folly." CHS 1/3/22) "Tune in (to self-reliance), drop out (of hyper-consumerism and debt-serfdom) and turn on (to relocalizing capital and agency)." (CHS 1/5/22) "The path to everything you desire starts here: like yourself as you are right now." (CHS 11/20/22) "There are only two signals: how many essentials you produce and share and if you're consuming less with better results. Everything else is noise." (CHS 12/17/22) "Liberation is no longer needing any confirmation or feedback from others or the world for one's sense of self. Wealth, fame, recognition, admiration, praise, prestige, approval, sainthood, martyrdom, success: none are needed, none are desired." (CHS 12/26/22) "When fame, wealth, prestige, status and glory are out of reach, you're free to pursue other more valuable things." (CHS 2/6/22) "It is the sacred duty of every activist who seeks to better their community to grow and share as much life-giving food as is humanly possible." (CHS 6/15/23) "Being anonymous, gray and unknown is the ideal state of freedom." (CHS 3/15/24) "We seem to have entered a world of anti-leisure and anti-productivity in which the unpaid shadow work demanded to keep all the complicated digital bits in motion obliterate our leisure and productivity." CHS (5/22/24) "It is axiomatic that failing systems work the best just before they fail catastrophically." Ray W. "Looking younger is mere technique; thinking younger demands creativity." CHS (10/16/24) "Tell me what's taboo and I'll tell you the truths that threaten the status quo." CHS (12/15/24) "This is the core of the Attention Economy: the ultimate addiction is the addiction to ourselves." CHS (1/28/25) "If You Seek the Truth, Look for What's Taboo." CHS (7/18/25) "My definition of self-reliance: the less you need, the easier it is to get what you need." CHS (7/26/25) "Mastery requires reading and doing." CHS (7/28/25) "The replacement of authentic value, quality, agency, choice, trust, legitimacy and experience with self-serving facsimiles is the key dynamic of Ultra-Processed Life, my term for the present-day human condition." CHS (8/12/25) "Ultra-Processed Life replaces an authentic experience with a synthetic, simulated, commoditized, highly profitable version that's superficially attractive but destructive over the long term." CHS (8/12/25) "What we see everywhere is the replacement of authentic things--including democracy--with synthetic facsimiles designed to maintain the illusion of choice and value." CHS (8/12/25) "Sometimes certainty is the enemy we don't even see and uncertainty is our most faithful ally." CHS (9/20/25) |
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