Economic Smoking Mirrors and Leverage: Why This Feels Like Groundhog Day
What we’re seeing right now is being mislabeled and giving us another Ground Hog Day.
Layoffs are not evidence that machines suddenly replaced people. The numbers don’t line up, and they never have. There is no credible connection between the scale of recent job cuts and any comparable increase in automated output. That explanation is convenient—but wrong.
What actually happened is simpler.
During COVID, stimulus distorted demand and money was cheap. Asset prices surged far beyond what the real economy could support. To protect those prices, many executives made decisions that didn’t make long-term economic sense but worked in the short term to keep valuations elevated and bonuses in play.
In the final economic kiss of death -- we created tariffs that shutdown the economy and we cut government programs. Considering the analysis below, both activities did more harm than good. Now the system is being forced back toward reality. Framing this as an “AI-driven shift” avoids saying what it really is: a recession that’s going to deepen as it works through the economy.
The 1929 Parallel That Matters
The meaningful comparison to 1929 isn’t technology. It’s leverage.
In 1929, households bought stocks on margin. When prices fell, collateral vanished, margin calls followed, and forced selling accelerated the collapse. The crash wasn’t caused by innovation—it was caused by leverage unwinding.
Today, leverage sits higher up the system. The wealthiest individuals don’t finance their lives by selling stock; they borrow against it. That works as long as prices rise. When prices fall, lenders demand more collateral. If it can’t be posted, shares are sold.
Different era. Same mechanics.
The Illusion of Extreme Wealth
Public net-worth figures create a false sense of stability. People “worth” hundreds of billions don’t have that in cash. Liquidating even a fraction would move markets against them. Much of that stock is also pledged as collateral, often tied to loans with variable terms.
What’s rarely discussed is the crowding-out effect. Large stock-backed loans absorb lending capacity and risk tolerance that would otherwise flow to small businesses, entrepreneurs, and middle-class households. As leverage at the top expands, borrowing for everyone else becomes tighter and more expensive. Over time, the middle class shrinks—loan by loan.
We are talking about trillions of dollars in stock-based borrowing layered onto an economy already short on real innovation.
Why the Math Matters
You don’t need an economics degree to see the imbalance.
The total value of the stock market is now roughly twice the size of the economy that supports it—higher than before 1929. Investors are paying far more for each dollar of corporate profit than history suggests is sustainable. Increasing amounts of borrowing are tied to asset prices rather than wages or business cash flow, meaning the system only works while prices continue to rise.
Credit has increasingly flowed toward asset owners and away from the middle class. Non-cash paper asset prices surged while wages lagged, creating wealth on paper without corresponding gains in middle-class income. The gap between asset values and earned income was filled with leverage (bubble).
When leverage unwinds, the damage appears first in markets and only later in employment.
Where Innovation Actually Comes From
Sustainable innovation does not come from leverage at the top. It comes from the middle.
Middle-class entrepreneurs innovate because they must solve real problems, not because they are defending balance sheets. When access to capital for that group is squeezed, innovation slows—even if asset prices remain elevated.
An economy that prioritizes protecting valuations over funding new ideas eventually loses momentum.
Groundhog Day Economics
At a certain point, this starts to feel like Groundhog Day. Different decade, different technology, same behavior. Each cycle convinces itself that this time is different, that new tools justify old excesses, that leverage is safe because the story sounds smarter. But the math never changes. Asset prices outrun the economy, leverage fills the gap, and the unwind follows.
What makes this moment dangerous isn’t ignorance—we’ve seen this before. It’s the decision to pretend we haven’t.
What Comes Next
The most likely outcome isn’t a sudden collapse of everyday life. It’s a correction that begins in financial markets and works its way down.
When asset prices fall, borrowing tightens. When borrowing tightens, hiring slows. Layoffs follow—not because technology replaced people overnight, but because leverage broke.
That’s how 1929 started.
The real risk today isn’t technological change. It’s believing the smoke and mirrors long enough to repeat the same mistake—just at a larger scale.
Addendum: Simple Ratios That Explain What’s Happening
Below are plain-English ratios you can reference. Each one compares what grew to what didn’t. No economics degree required.
1. Stock Market Value vs. the Real Economy
Ratio: Total Stock Market Value ÷ GDP
1929: ~100% of GDP
2024–2025: ~180–200% of GDP
Plain English: The paper value of stocks is roughly twice the size of the economy that has to sustain them.
2. Corporate Valuations vs. Profits
Ratio: Market Capitalization ÷ Corporate Profits (Price-to-Earnings)
Healthy range: ~15–18×
1929: ~30×
Recent years: 25–35×
Plain English: Investors are paying far more per dollar of profit than history says is sustainable.
3. Debt Used for Stocks vs. Income
Ratio: Margin & Stock-Backed Loans ÷ Household & Corporate Income
Plain English: More money is being borrowed against stocks than against wages or cash flow.
4. Credit to Asset Owners vs. the Middle Class
Ratio: Stock-Backed Loans ÷ Small Business & Consumer Lending Growth
Plain English: Credit flows to asset owners while the middle class gets crowded out.
5. Asset Inflation vs. Wage Growth
Ratio: Stock & Home Price Growth ÷ Median Wage Growth
Plain English: Asset prices rose far faster than wages.
6. Innovation Investment vs. Financial Engineering
Ratio: Stock Buybacks + M&A ÷ Capital Investment & New Business Formation
Plain English: Capital is defending prices instead of building the future.
7. Liquidity Dependence Ratio
Ratio: Asset Prices ÷ Interest Rates
Plain English: Prices were built on cheap money. Remove cheap money, and the math stops working.
Summary
Asset values grew much faster than incomes, profits, or productivity. The gap was filled with leverage. Now the leverage (bubble) is breaking.