The economic nightmare scenario is that the unprecedented spending on AI doesn’t yield a profit anytime soon, if ever, and data centers sit at the center of those fears. Such a collapse has come for infrastructure booms past: Rapid construction of canals, railroads, and the fiber-optic cables laid during the dot-com bubble all created frenzies of hype, investment, and financial speculation that crashed markets. Of course, all of these build-outs did transform the world; generative AI, bubble or not, may do the same.
The scale of the spending is absolutely mind blowing. We’re talking about $400 billion in AI infrastructure spending this year alone, which is like funding a new Apollo program every 10 months. But the revenue is basically pocket change compared to the spending.
As the article notes, the reality check is already happening.
Much is in flux. Chatbots and AI chips are getting more efficient almost by the day, while the business case for deploying generative-AI tools remains shaky. A recent report from McKinsey found that nearly 80 percent of companies using AI discovered that the technology had no significant impact on their bottom line. Meanwhile, nobody can say, beyond a few years, just how many more data centers Silicon Valley will need. There are researchers who believe there may already be enough electricity and computing power to meet generative AI’s requirements for years to come.
The whole house of cards is propped up by this idea that AI will at some point pay for itself, but the math just doesn’t add up. These companies need to generate something like $2 trillion in AI revenue by 2030 to even break even on all this capex, and right now, they’re nowhere close. OpenAI alone is burning through cash like it’s going out of style, raising billions every few months while losing money hand over fist.
I expect that once it’s finally acknowledged that the US is in a recession, that’s finally going to sober people up and make investors more cautious. The VCs who were happily writing checks based on vibes and potential will start demanding to see actual earnings, and that easy money environment that’s been fuelling this whole boom is going to vanish overnight.
When a few big institutional investors get spooked and start quietly exiting their positions, it could trigger a full blown market panic. At that point, we’ll see a classic death spiral. The companies that have been living on investor faith, with no real path to profitability, are going to run out of cash and hit the wall leading to an extinction level event in the AI ecosystem.
If tech stocks fall because of AI companies failing to deliver on their promises, the highly leveraged hedge funds that are invested in these companies could be forced into fire sales. This could create a vicious cycle, causing the financial damage to spread to pension funds, mutual funds, insurance companies, and everyday investors. As capital flees the market, non-tech stocks will also plummet: bad news for anyone who thought to play it safe and invest in, for instance, real estate. If the damage were to knock down private-equity firms (which are invested in these data centers) themselves—which manage trillions and trillions of dollars in assets and constitute what is basically a global shadow-banking system—that could produce another major crash.
When that all actually starts happening ultimately depends on how long big investors are willing to keep pouring billions into these companies without seeing any return. I can see at least another year before reality starts setting in, and people realize that they’re never getting their money back.
You’re preaching to the choir on this stuff. Totally agreed that it is a massive bubble and will collapse at some point.
I’m not sure I made my point clearly - the article (and your comment) explain very well why it is a bubble and that it will/should collapse. I am saying that it doesn’t explain how the collapse will happen ie the circumstances that would change between now and when it does. What I don’t understand is why it isn’t collapsing right now, with investors running for the hills. That kind of analysis was what I had hoped for in the article.
Think of it this way, the investors are basically like people going to a casino. They start with a bunch money, and they start losing that money over time. That’s what’s happening here. Right now, they still haven’t lost enough money to quit playing, they still think they’ll make their investment back. At some point they either run out of money entirely, or they sober up and decide to cut their losses. That’s what’s going to change between now and when the bubble starts to pop. We simply haven’t hit the inflection point when the investors start to panic.
This article is well written and interesting. Does not actually talk about how the AI crash happens
It does actually
The scale of the spending is absolutely mind blowing. We’re talking about $400 billion in AI infrastructure spending this year alone, which is like funding a new Apollo program every 10 months. But the revenue is basically pocket change compared to the spending.
As the article notes, the reality check is already happening.
The whole house of cards is propped up by this idea that AI will at some point pay for itself, but the math just doesn’t add up. These companies need to generate something like $2 trillion in AI revenue by 2030 to even break even on all this capex, and right now, they’re nowhere close. OpenAI alone is burning through cash like it’s going out of style, raising billions every few months while losing money hand over fist.
I expect that once it’s finally acknowledged that the US is in a recession, that’s finally going to sober people up and make investors more cautious. The VCs who were happily writing checks based on vibes and potential will start demanding to see actual earnings, and that easy money environment that’s been fuelling this whole boom is going to vanish overnight.
When a few big institutional investors get spooked and start quietly exiting their positions, it could trigger a full blown market panic. At that point, we’ll see a classic death spiral. The companies that have been living on investor faith, with no real path to profitability, are going to run out of cash and hit the wall leading to an extinction level event in the AI ecosystem.
When that all actually starts happening ultimately depends on how long big investors are willing to keep pouring billions into these companies without seeing any return. I can see at least another year before reality starts setting in, and people realize that they’re never getting their money back.
You’re preaching to the choir on this stuff. Totally agreed that it is a massive bubble and will collapse at some point.
I’m not sure I made my point clearly - the article (and your comment) explain very well why it is a bubble and that it will/should collapse. I am saying that it doesn’t explain how the collapse will happen ie the circumstances that would change between now and when it does. What I don’t understand is why it isn’t collapsing right now, with investors running for the hills. That kind of analysis was what I had hoped for in the article.
Think of it this way, the investors are basically like people going to a casino. They start with a bunch money, and they start losing that money over time. That’s what’s happening here. Right now, they still haven’t lost enough money to quit playing, they still think they’ll make their investment back. At some point they either run out of money entirely, or they sober up and decide to cut their losses. That’s what’s going to change between now and when the bubble starts to pop. We simply haven’t hit the inflection point when the investors start to panic.