So the most important question as one evaluates the frenzied AI investment landscape is not really whether it will pop or not, but what sort of legacy it will leave behind. Would the fallout include a hobbled financial system and an intractable, prolonged recession, as the bursting of the housing bubble left in its wake? Or is it more likely to look like the dot-com bubble, whose bursting produced a comparatively shallow economic downturn and ultimately gave the world the modern internet?
As I pointed out in my last column about AI, Gita Gopinath, former chief economist of the International Monetary Fund, calculated that a stock market crash equivalent to that which ended the dot-com boom would erase some $20tn in American household wealth and another $15tn abroad, enough to strangle consumer spending and induce a recession.
But the economic pain would depend to a large extent on how the AI investment surge is being financed. One problem is that we don’t really know.
The housing bubble was built from a boom in mortgage finance, as yield-seeking banks stuffed themselves with bonds built of bundles of mortgages to increasingly uncreditworthy borrowers. When the borrowers couldn’t pay, the boom left a forest of damaged balance sheets in its wake, from over-indebted households with no access to credit, to a banking system hobbled by worthless bonds. Financing froze. It took years for America’s credit-driven economy to recover.
AI could produce a similar landscape. A critical determinant is how much debt is at stake. It wouldn’t be such a problem if the bubble were financed largely from the cash pile of Alphabet and Amazon, Microsoft and Facebook. They might lose their shirt, but who cares. The worrying bit is that it seems they are increasingly relying on borrowing, which means the prospect of a bursting bubble would again put the financial system at risk.
Big Tech has raised nearly $250bn in debt so far this year, according to Bloomberg, a record. Analysts at Morgan Stanley suggest that debt will be needed to fill a $1.5tn funding gap to ramp up spending on data centers and hardware. Problematically, it is getting hard to follow the money, as Nvidia, Open AI and others in the ecosystem buy into each other, clouding who, in the end, will be left holding the bag.
The other question is to what extent the AI that the Silicon Valley faithful are building will endure. Railways survived the 19th century railway bust. The Internet survived the dot-com implosion. Is there anything of sufficient value to justify the current moment of euphoria, even if it heads south for a time?
Until a few weeks ago, I would have said sure: there must be something in Chat GPT or Claude that will raise business productivity. But to justify the vast quantities of money they are going to have to build something really impressive – as in superhuman general intelligence impressive. Over the last several weeks, a thought has bubbled up through the ecosystem that they won’t.
It’s a thought built on the thoughts of techier minds than mine. Yann LeCun, until recently Meta’s chief scientist and a winner of the Turing Award, has been saying that the massive spend on Large Language Models that today define the AI space is misguided. Artificial General Intelligence – aka the Superhuman – can only come about by dropping LLMs – which are essentially massive correlation engines – and switching to something else called a world model architecture, where machines develop a “mental” model of the outside world.
If he’s right, that would be one big oops for much of today’s AI spend. Nvidia and the rest of us may be about to learn, once again, that just because you sold a load of jeans and shovels, it doesn’t mean there is gold in them thar hills. - Eduardo Porter, The Guardian