People keep spouting this, but I don't see how the AI bubble bursting would be all that devastating.

2008 was a systemic breakdown rippling through the foundations of the financial system.

It would lead to a market crash (80% of gains this year were big tech/AI) and likely a full recession in the US, but nothing nearly as dramatic as a global systemic crisis.

In contrast to the dot com bubble, the huge AI spending is also concentrated on relatively few companies, many with deep pockets from other revenue sources (Google, Meta, Microsoft, Oracle), and the others are mostly private companies that won't have massive impact on the stock market.

A sudden stop in AI craze would be hard for hardware companies and a few big AI only startups , but the financial fallout would be much more contained than either dot com or 2008.

There's a few variables which can make it much worse.

The first is how much of the capital expenditures are being fueled by debt that won't be repaid, and how much that unpaid debt harms lending institutions. This is fundamentally how a few bad debts in 2008 broke the entire financial system: bad loans felled Lehman Brothers, which caused one money market fund to break the buck, which spurred a massive exodus from the money markets rather literally overnight.

The second issue is the psychological impact of 40% of market value just evaporating. A lot of people have indirect exposure to the stock market and these stocks in particular (via 401(k)s or pensions), and seeing that much of their wealth evaporate will definitely have some repercussions on consumer confidence.

Isn't the dot com bubble a far better proxy? Notably, todays spending is both higher and more concentrated in a few companies that a large part of the population has exposure to (most dot com companies weren't publicly traded and far smaller vs MSFT, Alphabet, Meta, Oracle, NVDA making up most investment today) by way of pension funds, ETFs, etc.?

Sure, but all of the above have solid businesses that rake in lots of money, revenue based on AI is a small percentage for them.

An AI bust would take the stock price down a good deal, but the stock gains have been relatively moderate. Year on year: Microsoft +14%, Meta +24%, Google +40, Oracle +60%, ... And a notable chunk of those gains have indirectly come from the dollar devaluing.

Nvidia would be hit much harder of course.

There is a good amount of smaller AI startups, but a lot of the AI development is concentrated on the big dogs, it's not nearly as systemic as in dot com, where a lot of businesses went under completely.

And even with an AI freeze, there is plenty of value and usage there already that will not go away, but will keep expanding (AI chat, AI coding, etc) which will mitigate things.

The problem is do you know much 14% etc is? We are talking about valuations in the trillions my friend!

> People keep spouting this, but I don't see how the AI bubble bursting would be all that devastating.

Well, an enormous amount of debt is being raised and issued for AI and US economic growth is nearly entirely AI. Crypto bros showed the other day that they were leveraged to the hilt on coins and it wouldn't surprise me if people are the same way on AI. It is pretty heavily tied to the financial system at this point.

I think my theory into contagion would be that There’s been lots of talk about these companies starting to rack up debt, and I think AI is so tied into the US GDP that things like -

If the stock market crashes, there’s lots of talk about how wealth and debt are interlinked. Could the crash be general enough to start calls on debt backed by stocks.

My recollection in 2008 was that we didn’t learn about how bad it was until after. The tech companies have been so desperate for a win, I wonder if some of them are over their skis in some way, and if there are banks that are risking it all on AI. (We know for some tech bros think the bet on AI is a longtermist like bet; closer to religion than reason and that it’s worth risking everything because the payback could be in the hundreds of trillions)

Combine this with the fact that AI is like what - 30% of the US economy? Magnificent 7 are 60%?

What happens if sustainable PE ratios in tech collapse. Does it take out Tesla?

Maybe the contagion is just the impact on the US economy which, classically anyways has been intermingled with everything.

I would bet almost everything that there is some lie at the center of this thing that we aren’t really aware of yet.

> Combine this with the fact that AI is like what - 30% of the US economy? Magnificent 7 are 60%?

Nowhere close. US GDP is like $30 trillion. Open AI revenue is ~$4 billion. All the other AI companies revenue might amount to $10 billion at most, and that is being generous. $10 billion/ $30 trillaion is not even 1%.

You are forgetting all those "boring" sectors that form the basis of economies like agriculture and energy. They have always been bigger than the tech sector at any point, but they aren't "sexy" because there isn't the potential "exponential growth" that tech companies

Small quibble, doesn't challenge your overall point, but as I understand it their revenue is somewhat higher than you say.

The Open AI revenue was ~$4 billion for the first half of the year; Anthropic recently reported a rate (which isn't total revenue, I know) equivalent to about $10 billion/year; NVIDIA's sales are supposed to be up 78% this quarter due to AI sales, reaching $39.33 billion, so plausibly ($39.33/1.78)*0.78 ~= $17 billion from AI in that quarter (rate, again yes I know, of $68 billion/year). So I can believe AI is order-of $100 billion/year economically… to US businesses with customers almost everywhere important except possibly China.

But just to re-iterate, this doesn't change your point. Even 100 B / 30 T is only one third of a percent.

It may well be that an AI bubble burst is the tipping point, but I think that tipping point was coming either way.

The US admin has been (almost desperately) trying to prop up markets and an already struggling economy. If it wasn't AI, it could have been another industry.

I think AI is more of a sideshow in this context. The bigger story is the dollar losing its dominant position , money draining out into Gold/Silver/other stock markets, India buying oil from Russia in Yen, a global economy that has for years been propped up by government spending (US/China/Europe/...), large and lasting geopolitical power balance shifts, ...

These things don't happen overnight, and in fact over many years for USD holdings, but the effects will materialize.

Some of the above (dollar devaluation) is actually what the current admin wanted, which I would see as an admission of global shifts. We might see much larger changes to the whole financial system in the coming decades, which will have a lot of effects.

When America sneezes, the rest of the world catches a cold. This was said after the OG 1929 crash and I can remember it said in the 80s. Nobody says it anymore.

Due to exorbitant privilege, with the dollar as the only currency that matters, every country that trades with America is swapping goods and services for 'bits of green paper'. Unless buying oil from Russia, these bits of green paper are needed to buy oil. National currencies and the Euro might as well be casino chips, mere proxies for dollars.

Just last week the IMF issued a warning regarding AI stocks and the risk they pose to the global economy if promises are not delivered.

With every hiccup, whether that be the dot com boom, 2008 or the pandemic, the way out is to print more money, with this money going in at the top, for the banks, not the masses. This amounts to devaluation.

When the Ukraine crisis started, the Russian President stopped politely going along with Western capitalism and called the West out for printing too much money during the pandemic. Cut off from SWIFT and with many sanctions, Russia started trading in other currencies with BRICS partners. We are now at a stage of the game where the BRICS countries, of which there are many, already have a backup plan for when the next US financial catastrophe happens. They just won't use the dollar anymore. Note that currently, China doesn't want any dollars making it back to its own economy, since that would cause inflation. So they invest their dollars in Belt and Road initiatives, keeping those green bits of paper safely away from China. They don't even need exports to the USA or Europe since they have a vast home market to develop.

Note that Russia's reserve of dollars and euros was confiscated. They have nothing to lose so they aren't going to come back into the Western financial system.

Hence, you are right. A market crash won't be a global systematic crisis, it just means that Shanghai becomes the financial capital of the world, with no money printing unless it is backed up by mineral, energy or other resources that have tangible value. This won't be great for the collective West, but pretty good for the rest of the world.

I have similar views on many points, see my response to a sibling comment.

I just think that effects of the AI bubble bursting would be at most a symptom or trigger of much larger geopolitical and financial shifts that would happen anyway.