Compounding Is Not the Eighth Wonder of the World

"Compound interest is the eighth wonder of the world."

Einstein never said this. That's the first problem.

The second problem is that even if he did, it would be terrible advice for the world we're walking into.

The Gospel

I've read the books.

The Intelligent Investor. Psychology of Money. A Random Walk Down Wall Street. Rich Dad Poor Dad. The Millionaire Next Door. The Bogleheads' Guide. I Will Teach You to Be Rich.

They all say some version of the same thing.

Start early. Be consistent. DCA into the index. Don't try to time the market. Let compound interest do the work. In 30 years you'll be rich.

And for the last 40 years, that advice was basically right.

If you bought the S&P 500 in 1985 and held it through 2025, you turned every $10,000 into roughly $400,000. Didn't need to be smart. Didn't need to pick stocks. Just needed patience and a Vanguard account.

The compounding gospel worked because the underlying assumption was true: the economy grows, corporate earnings grow, stocks go up over time.

Here's my question.

What if that assumption is breaking?

The Feedback Loop Nobody Talks About

The compounding thesis depends on one thing that nobody ever questions.

That the economy will keep producing returns the same way it always has.

More workers. More productivity. More consumer spending. More corporate revenue. More earnings. More growth. Repeat forever.

But what happens when AI removes workers from the equation?

Not some of them. A lot of them.

When a company replaces 40% of its workforce with AI, its productivity goes up. Its costs go down. Its earnings improve. The stock price rises.

Sounds great for your index fund.

Except those workers were also consumers. They were spending money at other companies. They were paying taxes. They were servicing mortgages. They were eating at restaurants and buying cars and paying for their kids' college.

When they lose their income — or get downshifted from $150K to $60K — that spending disappears from the economy.

The company that cut them looks great. The economy that depends on them spending starts to crack.

This is the feedback loop the compounding gospel ignores.

The S&P 500 isn't a magic money machine. It's a bet on the American consumer economy. And the American consumer economy runs on wages.

Labor's share of GDP is already at historic lows — 54% and falling. The portion of economic output that reaches workers as paychecks has been declining for decades. AI accelerates that decline off a cliff.

If labor share drops to 45% by 2035 — which the trajectory suggests — that's hundreds of billions of dollars per year that used to flow through households now flowing to capital owners instead.

Your index fund captures the capital side. It doesn't capture the demand destruction on the consumer side.

For a while, those two forces coexist. Companies get more profitable while consumers get squeezed. The stock market goes up while the real economy hollows out underneath.

But "a while" isn't forever. At some point, the consumer side catches up. Companies can't compound earnings when the people who buy their products are making less money every year.

That's not a recession. Recessions end. This is a structural shift in who captures economic value.

"But the Market Always Recovers"

Sure.

After the Great Depression, the S&P didn't recover in real terms for 25 years.

After Japan's bubble burst in 1989, the Nikkei didn't recover for 34 years. An entire generation of Japanese investors who followed the compounding playbook — buy the index, hold forever, let time work — waited their entire working lives to break even.

The standard response is: "And then it did recover. That's the point. Compounding works if you hold long enough."

But that response assumes the underlying economy eventually returns to the same growth engine. America after the Depression still ran on human labor, consumer spending, and industrial expansion. Japan eventually reflated.

What if the engine itself is changing?

What if AI creates a world where GDP keeps growing but the growth accrues to a shrinking number of companies and individuals? Where corporate earnings compound beautifully in aggregate while the median consumer's purchasing power declines?

Your index fund could return 8% a year for the next 20 years and the median person could still be worse off. Both things can be true simultaneously. Because the index captures the winners. The winners are the companies that replaced human labor with AI. And the losers — the displaced consumers whose spending powered the old economy — don't show up in the index. They just quietly stop buying things.

That's not a crash you can time. It's a slow erosion of the foundation the index is built on.

The Passivity Problem

Here's what really bothers me about the compounding gospel.

It teaches people to be passive.

Set it and forget it. Don't look at your portfolio. Don't try to be clever. Just DCA and wait.

That advice was designed for a stable world. A world where the rules don't change. Where the economy in 30 years looks roughly like the economy today, just bigger.

We are not in that world.

We're in a world where entire industries get repriced in a week. Where $2 trillion in software market cap evaporated in days. Where the structural relationship between corporate profits and consumer spending — the relationship your index fund depends on — is being rewired in real time.

In this world, "set it and forget it" isn't patience. It's a refusal to look at what's changing.

I'm not saying panic. I'm not saying day-trade. I'm saying the one thing the compounding playbook tells you not to do — pay attention, question the assumptions, think about whether the next 30 years look like the last 30 — is the one thing you actually need to do right now.

What I Actually Do

I need to be honest about my own position here, because the argument only works if I'm not being a hypocrite about it.

I still own public equities. I hold index positions. I believe in owning pieces of great companies for the long term.

But it's 10-15% of my assets. Not 90%.

The difference between those two numbers is the entire point of this essay.

The compounding playbook says put everything you can into the market. Max your 401(k). Your Roth. Your brokerage account. Every spare dollar into the index. The more you deploy, the more compounding works its magic.

I'm doing the opposite. I have a million dollars in cash. Every finance book I've ever read says that's insane. That cash is losing to inflation. That I should be deployed. That compounding is doing its magic for everyone else while I sit here earning nothing.

But here's what those books don't account for.

I think about money differently now. I used to think money's job was to grow. Compound. Multiply. Deploy into assets that appreciate and let time work.

Now I think money's job is to buy time.

Not returns. Time.

Time to think. Time to position. Time to build relationships. Time to wait for clarity during the most disorienting economic transition in a century.

What's the return on having 8 years of runway during a structural transition where most people have 3 months of savings?

What's the return on being able to say no to bad opportunities because you're not desperate?

What's the return on spending a year building relationships and documenting your thinking instead of scrambling for revenue?

I can't compound my way to those things. I can only buy them with cash and time.

The Honest Nuance

I want to be clear about something.

For most people in most circumstances, index investing is still probably the least bad option. I'm not saying burn your 401(k). I'm not saying go to cash. If you're 35 with a steady job and a diversified portfolio, you're probably fine. The compounding playbook has survived world wars, depressions, pandemics, and financial crises. It might survive AI too.

But "might" is doing more work in that sentence than it used to.

The people who say "just keep DCA-ing" aren't wrong about the math. They're wrong about the assumption underneath the math. The math works if the economy keeps producing returns the same way. If labor and capital keep growing together. If corporate profits and consumer spending keep reinforcing each other.

Those ifs used to be certainties. Now they're questions.

And the compounding gospel doesn't have a framework for asking questions. It only has a framework for not asking them.

The Real Question

The next time someone quotes "compound interest is the eighth wonder of the world" at you — the quote that Einstein never said, about a force that depends on an economy that may be fundamentally restructuring — ask them one question.

What exactly is compounding if the thing you're compounding into is changing underneath you?

They won't have an answer.

Because nobody's asking the question.