I’m actually uncertan about whether an AI bubble would trigger a recession (period of broad decline in economic activity). What I have seen reported is that the economy’s generally stagnant now, except for AI, and that American jobs may have been declining for months already, contrary to published statistics, motivating a recent rate cut by the Fed. If true, would an AI bubble really have substantial broader ripple effects outside the AI sector, and would those ripples even necessarily be negative?
In particular, I have been suspecting that the biotech winter that’s been going on for a few years is partly due to routing of investor money into the AI craze. Maybe that money just ends up funding other economic activity instead? I’m really unsure of how to think about this and am quite curious.
my mental model of how a pop triggers a broader crash is something like: a lot of people are taking money and investing it into AI stuff, directly (by investing in openai, nvidia, tsmc, etc) or indirectly (by investing in literally anything else; like, cement companies that make a lot of money by selling cement to build datacenters or whatever). this includes VCs, sovereign wealth funds, banks, etc. if it suddenly turned out that the datacenters and IP were worth a lot less than they thought it was, their equity (or debt) ownership is suddenly worth a lot less than they thought it was, and they may become insolvent. and lots of financial institutions becoming insolvent is pretty bad.
Hm. It seems like the extent to which there is an increased risk of insolvency due to a popped AI bubble would partly depend on the extent to which these institutions had sold other assets or used leverage to pay for equity in or lend to AI companies and the suppliers that are most dependent on AI company business.
My understanding is that the great financial crisis resulted from extremely leveraged investments in mortgages due to lenient rules and a perception that American mortgages were extremely reliably paid. I don’t know to what extent important institutions may be overleveraged or overweighted in their investments in AI.
But my modal prediction is that an AI bubble would cause hedged AI investors to become less valuable without becoming insolvent, a bunch of distressed assets to be purchased for low low prices by those who kept their powder dry, and a bunch of cancelled orders and perhaps layoffs and restructuring by suppliers who expanded to meet the temporary surge in demand by AI companies. That could cause turmoil, but I really don’t have a sense of to what extent the American or global economy has reshaped itself to build out AI. It’s hard to know particularly because with Trump’s tariffs, there has been so much coincident market turmoil that it’s hard to know how much is AI and how much is tariffs/end of ZIRP (as others have pointed out before).
I’m actually uncertan about whether an AI bubble would trigger a recession (period of broad decline in economic activity). What I have seen reported is that the economy’s generally stagnant now, except for AI, and that American jobs may have been declining for months already, contrary to published statistics, motivating a recent rate cut by the Fed. If true, would an AI bubble really have substantial broader ripple effects outside the AI sector, and would those ripples even necessarily be negative?
In particular, I have been suspecting that the biotech winter that’s been going on for a few years is partly due to routing of investor money into the AI craze. Maybe that money just ends up funding other economic activity instead? I’m really unsure of how to think about this and am quite curious.
my mental model of how a pop triggers a broader crash is something like: a lot of people are taking money and investing it into AI stuff, directly (by investing in openai, nvidia, tsmc, etc) or indirectly (by investing in literally anything else; like, cement companies that make a lot of money by selling cement to build datacenters or whatever). this includes VCs, sovereign wealth funds, banks, etc. if it suddenly turned out that the datacenters and IP were worth a lot less than they thought it was, their equity (or debt) ownership is suddenly worth a lot less than they thought it was, and they may become insolvent. and lots of financial institutions becoming insolvent is pretty bad.
Hm. It seems like the extent to which there is an increased risk of insolvency due to a popped AI bubble would partly depend on the extent to which these institutions had sold other assets or used leverage to pay for equity in or lend to AI companies and the suppliers that are most dependent on AI company business.
My understanding is that the great financial crisis resulted from extremely leveraged investments in mortgages due to lenient rules and a perception that American mortgages were extremely reliably paid. I don’t know to what extent important institutions may be overleveraged or overweighted in their investments in AI.
But my modal prediction is that an AI bubble would cause hedged AI investors to become less valuable without becoming insolvent, a bunch of distressed assets to be purchased for low low prices by those who kept their powder dry, and a bunch of cancelled orders and perhaps layoffs and restructuring by suppliers who expanded to meet the temporary surge in demand by AI companies. That could cause turmoil, but I really don’t have a sense of to what extent the American or global economy has reshaped itself to build out AI. It’s hard to know particularly because with Trump’s tariffs, there has been so much coincident market turmoil that it’s hard to know how much is AI and how much is tariffs/end of ZIRP (as others have pointed out before).