The AI Bubble Should Have Never Existed In The First Place

But the reason it does will piss you off.

Photo by SIMON LEE on Unsplash

The AI Bubble Should Have Never Existed In The First Place

But the reason it does will piss you off.

So much money has been poured into AI that we have effectively bet the entire economy on its success. That is a huge problem. Not just because AI is a fundamentally flawed technology that will never be profitable, never live up to the speculation, and is creating a debt bomb on a scale never seen before. No, you see, even if I am wrong and the AI investors are right, we are all still screwed, as AI will take a huge number of jobs and crash the economy from the bottom up. It is a moronic lose-lose situation. But it didn’t have to be this way. Hell, it should never have been this way. If companies had just taken an iota more responsibility, the ticking economic time bomb that is the AI bubble would have never happened, and you would be exponentially better off. Let me explain.

Why does the AI bubble exist? Not the surface speculation, but the actual structural forces behind it. Well, there are four simple yet devastating reasons.

Valuation

The primary driver of the AI bubble is Big Tech, such as Google and Microsoft. These are some of the most valuable companies on the planet. But what makes them so valuable?

It isn’t their profits. For example, Alphabet (Google’s parent company) made just over $100 billion in profit in 2024 and was worth $2.36 trillion at the time. Meanwhile, Saudi Aramco, an oil giant, made slightly more profit in 2024 but was only valued at $1.6 trillion. In other words, investors value each dollar of profit Google makes nearly 50% higher than each dollar Aramco makes. Why?

Ultimately, the big driver of valuation in Big Tech isn’t profit, but the potential for future growth from radical innovation. After all, Aramco is limited by how much oil they can drill up and how quickly we can burn it all and destroy the planet. But Google’s domain is cyberspace, which means it is boundless. Right?

Well, if you look at Big Tech’s profits, they soared in the late noughties but only grew marginally after that. They have spiked since 2020, not from radical, market-changing innovation, but rather from tax reforms that reduce how much revenue they can hide offshore and from tightly squeezing their consumers. Indeed, user sentiment toward Big Tech is at an all-time low because of this. In other words, Big Tech’s real-world growth has only been marginal for nearly two decades, and they are starting to push up against market limits, with no innovative growth in sight.

But, for Big Tech to keep its sky-high valuations, it needs to be seen as being in the process of delivering radical innovation, especially after a decade of comparatively slow growth. Otherwise, investors will realise they have butted up against the market limits, and they will value them similarly to Aramco, wiping hundreds of billions of dollars off their value.

In short, going into the 2020s, Big Tech needed to be seen as delivering on the market-altering innovations investors had bet on. Guess what filled that spot?

The Wealth Build-Up

During that decade of comparatively slow growth, Big Tech hoarded a ton of cash for no other reason than tax avoidance.

By exploiting gaps in international tax laws and tax havens where corporate tax is effectively zero, Big Tech avoided hundreds of billions of dollars in tax. By 2015, Big Tech had amassed over $1.5 trillion in these tax havens, which is roughly the same as the entire Canadian economy. That figure grew significantly from there, so by the start of the 2020s, Big Tech had literal trillions of dollars on hand.

But they couldn’t touch it, because as soon as this money was transferred out, it would be taxed. And what were they going to do? Contribute to the society that made them so damn wealthy? No, they would rather hoard away more money than a first-world country’s economy.

This set the stage. An ever-increasing pressure to be seen as delivering market-altering innovation and enough wealth to make Smaug look destitute. All that was needed was a way to combine the two.

The Release

Trump, in his infinite Big Mac-soaked wisdom, implemented the 2017 Tax Cuts and Jobs Act (TCJA), which enabled Big Tech to access its immense cash reserves.