Boom: Bubbles and the End of Stagnation

by Byrne Hobart

Where there is no vision, the people perish.

While our slick screens and the virtual worlds they depict suggest an era of technological abundance, progress in the world of atoms, not bits, is in freefall. According to some of the best quantitative measurements available, the pace of technological improvement has halved.

After the Manhattan Project and the Apollo program, whose major technological innovations—atomic bombs, nuclear energy, rockets, semiconductors—were largely physical, progress became increasingly confined to the virtual.

In other words, instead of building the future, we are becoming better at developing increasingly realistic simulations of it.

Across these disparate cases, we find that step-function improvements follow a J-shaped graph. To everyone but true believers, the initial stages of the endeavor look like wasted effort, but these early attempts ultimately deliver outsized gains.

Perhaps even more surprisingly, we find that technological breakthroughs and scientific megaprojects share an underlying dynamic with financial bubbles in one very specific sense: they coordinate behavior to build a complex future. Against the standard view in economics and finance, which holds that speculative financial bubbles are intrinsically negative phenomena, we develop a model of bubbles as innovation accelerators.

Technological innovation is more driven by excess, exuberance, and irrationality than by cost-benefit analyses, rational calculation, and careful and deliberate planning. Reality-bending delusions are underrated drivers of techno-economic progress.

Yet not all bubbles are wealth- and value-destroying events. By generating positive feedback cycles of excessive enthusiasm and investment, certain financial bubbles mobilize the capital necessary to fund disruptive technologies at the frontier of innovation and accelerate breakthroughs in science, technology, and engineering.

Crucially, such bubbles decouple investment from purely rational, backward-looking expectations of economic return, which correspondingly reduces risk aversion. Therein lies our escape from the Great Stagnation.

In Part II of this book, we’ll show how bubbles, by coordinating the large-scale capital allocation that technological breakthroughs require, help us overcome our aversion to risk and open a path to a more advanced and prosperous future—one in which we overcome the existential risk of not making enough progress.

Financial bubbles, technological developments, and even the rise of governments and religions demonstrate that social systems are inherently reflexive—that predictions, like self-fulfilling prophecies, can affect or create the reality they try to predict.

It’s telling that right after the Moon landing the use of the word “progress” started to decline and use of the term “innovation” took off, reflecting a linguistic narrowing that refers almost exclusively to developments in software and information technologies.

Over a decade ago, the visionary sci-fi writer Neal Stephenson lamented that “believing we have all the technology we’ll ever need, we seek to draw attention to its destructive side effects.”

In stark contrast to our visionless age, and against the common-sense conception of technology as intrinsically soulless and devoid of any higher meaning, Chapter 10 shows that the majority of the techno-scientific breakthroughs of the last hundred years—including nuclear energy, the space program, AI, genetic engineering, and Bitcoin—were, to a large extent, driven and shaped by deeply ideological, spiritual, and religious beliefs. Unless and until we recapture that transcendent dimension, we will never escape stagnation.

Innovation-accelerating bubbles—which emerge around a definite, optimistic vision of the future—induce meaning, as participants in a bubble share the conviction that their pursuit, while uncertain, promises to realize something that transcends the present. A bubble is therefore not simply a collective delusion but an expression of a future that is radically different from now.

The increasing frequency and magnitude of financial bubbles since the 1970s can also be interpreted as a symptom of stagnation. The absence of techno-scientific progress, coupled with an abundance of capital enabled by experimental monetary policies and a general scarcity of vision, has fueled many of the bubbles we’ve witnessed in the past few decades. But, as we’ll show, these bubbles, which are largely driven by financialization, low yields, and the lack of productive investment opportunities, need to be distinguished from innovation-accelerating bubbles.

For most of history, there was no expectation of infinite techno-scientific progress. On the contrary, in classical antiquity, innovation was considered to be outright heretical and dangerous, as it destabilized the natural order of divine or moral sovereignty.

In ancient Greek philosophy, there is a distinction between change (metabole) and innovation (kainotomia). Ancient philosophers such as Aristophanes, Xenophon, and Plato affirmed change as a divine or natural process that is gradual and continuous. The ancients rejected “innovation” as heretical and subversive precisely because it represented an intervention in the established divine or natural order. In our age, innovation has turned from heresy into idolatry. As we employ the term here, “progress”—in a politically agnostic sense—refers to a process or phenomenon that is positively connotated.

What happened to the future? Capitalism, it seems, is haunted by the specter of stagnation. While it may appear that technological innovation continues to accelerate, this is merely an illusion, sustained by and mediated to a large extent through our smartphones. In reality, we have entered an age of deceleration and decline. As one noted tech investor summed it up, “We wanted flying cars, instead we got 140 characters.”

Divorced from gold’s physicality and unbounded from a reality anchor, the US dollar became a fiat currency—a virtual abstraction. The floating-fiat currency system ushered in the dawn of a new age of total financialization and dematerialized money.

Because the continuous devaluation of fiat currencies increases what economists call time preferences—the preference for immediate utility and short-term consumption over delayed utility and long-term investment—there was a general discounting of the future.

If we invariably prefer having something in the present to having it in the future, the expectation of a constant erosion in monetary value forces us to immediately spend fiat currency in the present. Conversely, the less the supply of a monetary medium gets inflated, the more we can expect it to maintain or even appreciate in value over time. This reduces our uncertainty about the future. The future gets less discounted, and long-term planning and investment becomes more likely.

So there’s a vicious cycle wherein aging populations make housing more expensive, which slows family formation and further contributes to aging.

The history of business is littered with examples that refute the “myth of the objective.” 37 It took Nintendo almost a century to invent the iconic Super Mario Brothers; YouTube was initially envisioned as a video dating site; Slack started as an internal communication tool for programmers developing an online game. Greatness often doesn’t follow predefined milestones.

As we show in Part II of this book, the Apollo program and the Manhattan Project were simultaneously decentralized and centralized, and benefited both from highly individualistic and collectivist cultures.

The quantification of scientific productivity—its reduction to a simple and clean metric—rewards conformity and cultivates risk aversion. It’s no wonder, then, that a recent paper found that the larger a scientific field gets, the more progress in the field slows down.

When the US terminated the Bretton Woods agreement in 1971, the global financial system entered a new paradigm defined by an open system of intensified capital flows, untethered exchange rate volatility, and increasingly frequent and destructive financial crashes.

Non-US economies need US dollars, partly because the dollar is so dominant in global trade. (It’s hard to spend South African rand in Chile or Chilean pesos in South Africa, so typically two countries that don’t have widely used currencies will denominate their trade in some other currency, most often the dollar.) This means that foreign banking systems need dollar reserves, and their central banks need dollar-denominated assets, too. All of this can only be in equilibrium if the US is a net exporter of dollars—that is, if there’s a persistent trade deficit.

Today, AI-powered chatbots can help you book a flight to London while riding the New York City subway. But the subway infrastructure itself was built at the beginning of the last century, and the flight will take longer than it would have in the 1970s. The infrastructure of the world beyond our smartphones is deteriorating, if not collapsing.

The core assumption of the post-Bretton Woods economic regime is that the future should essentially be a continuation of the present—that volatility, be it financial, geopolitical, or macroeconomic, should be minimized with all sorts of instruments, including monetary policies, derivatives, leverage, and risk models.

In trader lingo, markets are dominated by “short volatility” trades, which generate profits in a low-volatility world where the future looks like the present. 47 What enabled these short-volatility strategies were interventionist global central bank policies.

Over the past decade, the unprecedented monetary experimentations of global central banks following financial volatility—immortalized in the “money printer go brrrrr” meme—have given rise to a “buy the dip” mentality among investors and traders. The presence of an omnipotent Fed as a price-insensitive and automatic buyer of last resort has spawned a multi-trillion-dollar short-volatility complex, in which the immediate future is projected to be like the present and the only direction for markets to go is up.

By interfering in a way that has mispriced risks, central banks have fundamentally distorted risk-taking, resulting in the misallocation of capital.

Meanwhile, for countries that don’t produce a reserve currency, the paradoxical result is that they need to run a trade surplus in order to accumulate the dollars required to participate in the global trade and financial systems. So poorer countries end up with higher savings rates used, through many layers of indirection, to finance higher consumption in rich countries. This pattern has a profound effect on societal time preferences, which come to reflect a declining concern for the future.

We tend to discount the future. A dollar now is more valuable than a future dollar, which cannot be invested to compound more dollars and will, over a long enough time horizon...

Because of the relentless devaluation of fiat money that has occurred in the past five decades, we’re forced to become semi-professional hedge fund...

The abandonment of Bretton Woods means monetary value can no longer be stored over time. Instead of taking calculated risks with savings that have future purchasing power, the post-Bretton Woods sy...

These higher time preferences manifest in the simultaneous abundance of capital and scarcity of vision. Low interest rates are not used to invest in risky, long-term R&D but for large-scale share buybacks and dividends, which are essentially a way for company management to ask shareholders if they have any ideas for good investments.

The massive cash holdings of some of the largest tech companies—Apple, for example, had around $112 billion worth of cash and securities on hand in early 2023—attest to the lack of ideas regarding how to invest in the future. Microsoft, Apple, and Alphabet, it seems, don’t know what to do with their money anymore.

So low rates do subsidize more forward-looking companies; mathematically, the further out in the future a company’s profits are, the more valuable those profits get when interest rates decline.

Initially, these developments resist categorization because they occur before there’s even a defined category, sector, or industry for them. The atomic bomb preceded the “defense space”; the “space industry” emerged decades after Apollo; “crypto” followed Bitcoin.

Markets dominated by passive investing also reinforce concentrated ownership by the largest megafirms. Perversely, while based on the assumption that markets are highly efficient, the rise of passive investing makes markets less efficient and more sensitive to extreme financial events.

Consequently, “creative destruction without destruction,” “capitalism without bankruptcy,” and “risk without consequences” essentially amount to Christianity without Hell.

The postmodern philosopher Jean Baudrillard was not primarily thinking about finance when he came up with the idea of hyperreality, but the term is apt in this post-Bretton Woods universe, where hyper-financialization and central bank intervention have created the financial low-volatility complex. Baudrillard defines hyperreality as “the generation by models of a real without origin or reality… a liquidation of all referentials.”

Under Bretton Woods, in which financial speculation was anchored to the physicality of gold, recessions caused market crashes. Now a market crash no longer signals a recession—it becomes the recession itself.

Representation and referent collapse into each other; the signifier becomes the signified. Or, as Baudrillard puts it, “truth, reference, objective cause have ceased to exist.”

Financial markets have entered the age of the simulacrum, which substitutes the “signs of the real for the real.” 56 As Baudrillard defines it, referencing Ecclesiastes, the simulacrum “is never that which conceals the truth—it is the truth which conceals that there is none. The simulacrum is true.”

Whereas the last century brought radically different and almost incommensurate phases in art, architecture, literature, and film, the past three decades have been characterized by a “recession of novelty” 58 and a period of increasing homogeneity.

This need for novelty is shallowly satisfied by the algorithmic intensification of perception, consumption, and simulated experiences, whether in cyberspace or through mind-augmenting substances. Virtual surrogates of risk-taking have replaced actual risk-taking. Empire-building is restricted to strategy games, romantic conquests are substituted with virtual-reality porn, and the drive for greatness and heroism is passively sublimated into the latest Marvel movie.

It is unsurprising, then, that there has been accelerated innovation in technologies of simulation. As the anthropologist David Graeber noted, instead of engineering the future depicted in science fiction, technologists have built devices that better simulate the future.