Will AI take all our jobs? Is it going to be a SkyNet-esque existential threat to humanity? Absolutely not. This fear-driven propaganda has been shoved down our throats for years now. In the real world, AI isn’t even that useful a tool. A recent MIT study found that 95% of AI pilots actually lowered productivity. AI can barely organise a back office, but that isn’t what makes it dangerous. You see, there is a very real chance it could destroy our economy from the top down, not the bottom up. Remember that moment from the “Big Short”, where a stripper tells Mark Baum she has a silly number of houses, and he suddenly realises a total market collapse is imminent? Yeah, we have just had that moment with AI. Let me explain.
Before we go on, do not take financial advice from this article. Conduct your own research and consult with financial experts.
I have already explained why the AI industry is in a bubble, and how it will affect the economy when it pops. If you want the details, click here and here.
But basically, no AI company or AI infrastructure is profitable. They are all losing money hand over fist. As such, they are using equity financing (selling shares of the company) or debt financing (borrowing money) to keep the lights on. However, because of the perceived notion of an AI race, the muddiness around AI’s real-world performance and the misinformed idea that an AI with more infrastructure behind it will be better, these companies’ values are tied to their expenditure. So they are also using equity and debt financing to spend hundreds of billions of dollars on AI expansion, which in turn raises their value, enabling more equity and debt financing to spend more and increase the value further and so on. However, not only are current AI models not accurate enough to be useful and profitable tools, but they have also reached a point of major diminishing returns. As such, the colossal amount of cash being pumped into them is only marginally improving them, meaning they will remain too inaccurate to even get close to their promised usefulness.
This is an obvious bubble. Values are being artificially pumped up when the core of the business is far from solid. We are even starting to get things like circular financing (Nvidia & OpenAI’s $100 billion chip deal) and AI companies hiding debt with SPVs (Meta’s $26 billion debt bid), which painfully mirrors other bubbles like the dot-com bubble.
I, and many others, have been warning of an AI bubble for years now. But major financial institutions have only just started to notice and ring the alarm bells.
A few days ago, the Bank of England said that it sees serious trouble ahead for global financial markets if investors U-turn on the prospects of AI, and, because of the reasons listed above, such a U-turn is possible. They even went as far as to say that “The risk of a sharp market correction has increased,” and that “If a sharp correction were to occur, tighter financial conditions could drag down world growth, expose vulnerabilities, and make life especially tough for developing countries.” A statement the IMF backed up.
Similar warnings came from Jamie Dimon, the head of the US’s largest bank, JPMorgan. In a recent interview, Dimon said he is “far more worried than others” about a serious market correction, which he said could come in the next six months to two years. Unlike the BoE or IMF, he didn’t directly blame AI, but we shouldn’t be suprised, as JPMorgan has massively invested in and lent to the AI industry under Dimon. He isn’t about to admit he is one of the people holding the murder weapon.
Deutsche Bank went one step further and actually calculated the extent of the AI bubble. They found that even with these interest rate cuts, the AI bubble is the only thing helping the US economy avoid a recession. Essentially, Deutsche Bank found that the AI industry’s utterly gargantuan investment in data centres is artificially inflating the US’s GDP. In fact, around half the current growth of index funds like the S&P 500 has been driven by the tech companies expending effort into data centres. It isn’t normal for a single industry to do that! If you exclude this expenditure from the US’s GDP, its growth has actually dropped off rapidly to near zero, which is a key warning sign of an upcoming recession.
This is all well and good, but the big question is, what will cause this gargantuan bubble to pop?!
This is where our “Big Short” moment comes in.
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