we are 38 trillion in debt, so the bailout games are coming to an end.
I assume morons like Obama and McCain would again be willing to suspend a campaign to bail out their rich buddies on the next bubble burst
AI bubble burst
- Thread starter goat
- Start date
I assume morons like Obama and McCain would again be willing to suspend a campaign to bail out their rich buddies on the next bubble burst
Explain what the AI "bubble" is and what "bursting" would mean?
With the dot-com issue it was based on thousands of companies that made no profit who had massive market caps. But there is no parallel to AI, which already has a highly profitable business model.
So explain what this "crash" would be?
the concern I have heard is the sheer cost of data centers to get to where we need to go
The AI Bubble Is Bigger Than You Think - The American Prospect
It’s not just OpenAI that looks overhyped. There’s a whole mountain of sketchy financial engineering underneath.
prospect.org
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The build-out of computing power for AI needs about $2 trillion in annual revenue by the end of the decade to justify the current and planned investment. It’s an insane amount of money, nobody has it—nobody may ever have it—and so everything being constructed now, from the GPUs needed to train AI models to the data centers housing them to the energy supplying those data centers, needs some creative financing.
the concern I have heard is the sheer cost of data centers to get to where we need to go
The AI Bubble Is Bigger Than You Think - The American Prospect
It’s not just OpenAI that looks overhyped. There’s a whole mountain of sketchy financial engineering underneath.
--------------------------
The build-out of computing power for AI needs about $2 trillion in annual revenue by the end of the decade to justify the current and planned investment. It’s an insane amount of money, nobody has it—nobody may ever have it—and so everything being constructed now, from the GPUs needed to train AI models to the data centers housing them to the energy supplying those data centers, needs some creative financing.
First off, thank you. That is a good article.
Where I disagree is in the returns. Data centers, especially Amazon Web Services and Microsoft Azure already generating trillion dollar returns over the course of a decade. Amazon particularly has been successful in selling products that leverage AI. The same holds true with Google, which powers Android Auto and Apple Car play that are sold in nearly all new vehicles - whether you you them or not.
I agree with the author that Meta is a basket case and will face plant, but that isn't a complete collapse, it is a single, albeit large and significant company, making missteps that will eventually lead to bankruptcy. Apple is likely to suffer the same fate.
I don't see a bubble so much as a reshuffling.
reshuffling chairs on the titanic is what I see. I asked Ai a pretty simply question - and here is the reply "the fed dual mandate and human innovation. aren't we reaching a red line here? Is a crisis inevitable?"
------------------------
The dual mandate is:
(1) Price Stability
Target ~2% inflation so the economy avoids:
- Deflation (falling prices, wage cuts, debt spirals)
- High inflation (destroys planning, savings)
Not zero unemployment, but the highest sustainable employment consistent with low inflation.
The Fed basically tries to balance:
Inflation too high → raise rates → unemployment rises
Unemployment too high → cut rates → inflation rises
Historically this tradeoff has worked.
AI introduces a structural shock unlike anything since mechanization or electrification — but faster and across every sector simultaneously.
Two things happen at once:
A. Downward price pressure (disinflation/deflation)
AI makes:
- labor cheaper or unnecessary
- production cheaper
- services faster & nearly costless
- digital goods infinite in supply
B. Downward employment pressure
AI threatens large categories of jobs:
- clerical
- administrative
- coding
- logistics
- design
- accounting
- customer service
- legal drafting
- marketing
- financial modeling
- diagnostics
If AI pushes inflation too low (or into deflation), the Fed normally cuts rates.
But cutting rates doesn’t fix AI-driven unemployment, because the unemployment isn't cyclical — it’s structural. Meaning:
- Lower rates won’t cause companies to hire people they no longer need.
- Cheap borrowing won't reverse automation.
- Aggregate demand stays weak.
- Price pressure stays down.
Fight unemployment → must stimulate economy → drives inflation UP
Fight inflation → must tighten economy → drives unemployment UP
But AI drives:
- Inflation DOWN
- Employment DOWN
This is the true Catch-22.
Historically, deflationary productivity shocks (like electrification) increased employment after a transition period.
AI may not.
AI at scale can:
- Replace human labor faster than new sectors absorb workers
- Generate abundance with minimal human input
- Collapse certain labor markets permanently
If that decoupling becomes durable, the Fed’s dual mandate breaks because the model assumes:
Productivity ↑ leads to wages ↑ and employment ↑
(the basis of Phillips Curve relationships)
AI breaks the Phillips Curve entirely.
Will this become an inevitable problem?
Short answer: Yes, unless something big changes.
Here’s why:
- AI is deflationary
- AI is labor-replacing
- Fed system assumes GDP growth requires labor
- Fed tools affect demand but not automation-driven supply shocks
Eventually the Fed will hit a point where:
- they cannot raise employment through interest rates
- they cannot maintain inflation through conventional tools
At that moment, the dual mandate becomes unachievable.
Economists increasingly predict that society will need non-Fed tools:
✔ Income supports (UBI, wage subsidies)
✔ Fiscal stimulus that isn’t tied to labor
✔ Worker retraining at unprecedented scale
✔ New tax models (automation taxes? productivity taxes?)
✔ Redefinition of “employment”
✔ A possible new Fed mandate
The Fed can’t solve a structural labor displacement problem using rate adjustments.
This means Congress may need to rewrite economic frameworks the same way it did in the 1930s (FDIC, FHA, Social Security) and the 1970s (dual mandate itself).
reshuffling chairs on the titanic is what I see. I asked Ai a pretty simply question - and here is the reply "the fed dual mandate and human innovation. aren't we reaching a red line here? Is a crisis inevitable?"
------------------------
The dual mandate is:
(1) Price Stability
Target ~2% inflation so the economy avoids:
(2) Maximum Employment
- Deflation (falling prices, wage cuts, debt spirals)
- High inflation (destroys planning, savings)
Not zero unemployment, but the highest sustainable employment consistent with low inflation.
The Fed basically tries to balance:
Inflation too high → raise rates → unemployment rises
Unemployment too high → cut rates → inflation rises
Historically this tradeoff has worked.
AI introduces a structural shock unlike anything since mechanization or electrification — but faster and across every sector simultaneously.
Two things happen at once:
A. Downward price pressure (disinflation/deflation)
AI makes:
This pushes prices down, maybe even below zero inflation.
- labor cheaper or unnecessary
- production cheaper
- services faster & nearly costless
- digital goods infinite in supply
B. Downward employment pressure
AI threatens large categories of jobs:
This reduces labor demand even as productivity explodes.
- clerical
- administrative
- coding
- logistics
- design
- accounting
- customer service
- legal drafting
- marketing
- financial modeling
- diagnostics
If AI pushes inflation too low (or into deflation), the Fed normally cuts rates.
But cutting rates doesn’t fix AI-driven unemployment, because the unemployment isn't cyclical — it’s structural. Meaning:
So the Fed is stuck:
- Lower rates won’t cause companies to hire people they no longer need.
- Cheap borrowing won't reverse automation.
- Aggregate demand stays weak.
- Price pressure stays down.
Fight unemployment → must stimulate economy → drives inflation UP
Fight inflation → must tighten economy → drives unemployment UP
But AI drives:
And the tools to fix one worsen the other.
- Inflation DOWN
- Employment DOWN
This is the true Catch-22.
Historically, deflationary productivity shocks (like electrification) increased employment after a transition period.
AI may not.
AI at scale can:
This “decouples” productivity from employment — something economists long assumed was impossible.
- Replace human labor faster than new sectors absorb workers
- Generate abundance with minimal human input
- Collapse certain labor markets permanently
If that decoupling becomes durable, the Fed’s dual mandate breaks because the model assumes:
Productivity ↑ leads to wages ↑ and employment ↑
(the basis of Phillips Curve relationships)
AI breaks the Phillips Curve entirely.
Will this become an inevitable problem?
Short answer: Yes, unless something big changes.
Here’s why:
- AI is deflationary
- AI is labor-replacing
- Fed system assumes GDP growth requires labor
- Fed tools affect demand but not automation-driven supply shocks
Eventually the Fed will hit a point where:
- they cannot raise employment through interest rates
- they cannot maintain inflation through conventional tools
At that moment, the dual mandate becomes unachievable.
Economists increasingly predict that society will need non-Fed tools:
✔ Income supports (UBI, wage subsidies)
✔ Fiscal stimulus that isn’t tied to labor
✔ Worker retraining at unprecedented scale
✔ New tax models (automation taxes? productivity taxes?)
✔ Redefinition of “employment”
✔ A possible new Fed mandate
The Fed can’t solve a structural labor displacement problem using rate adjustments.
This means Congress may need to rewrite economic frameworks the same way it did in the 1930s (FDIC, FHA, Social Security) and the 1970s (dual mandate itself).
Now you're getting into a different subject, the REAL subject.
It isn't that AI is a "bubble" in the sense of the CRA and MBS disaster, it's that AI is a paradigm shift that disrupts and redefines the division of labor.
The Industrial Revolution undercut artisans and trades, depriving smiths and other in low skill jobs of their livelihoods. It was disruptive but the civilized world was still mostly agricultural at the time and those affected were in the lower classes. Obviously the ultimate result was massive prosperity for humanity as a whole, but the immediate shock altered how goods were produced and put the small producers out of work.
AI differs in that it affects the professional class. Joe Biden told Americans to "learn to code," that was stupid advice (from a stupid man.) Coding, accounting, and even my field of Logistics are being replaced by AI. Today I can still design production flow superior to what AI can design. But that won't be true in 5 years. Already AI can produce code that is more efficient and bug free than even the best programmers. And financial analysis is beyond what even the best cost accountants can do.
This isn't blue collar - this is top of the food chain white collar, people with advanced degrees and defined skills. AI will infringe on medicine and law as well. There is no field that is mostly intellectual that won't be affected.
Oligarchs like Bill Gates and Tim Cook will expect people to just sink into dire poverty while the 1% dominate. That isn't going to happen. The educated classes aren't going to simply lay down.
I don't see a bubble, but I do see a looming revolution.
Our economy itself is a bubble. The earning potential of a high school educated worker in America compared to the rest of the world is itself a huge bubble that will burst.
The thing is that automation has already replaced most low skill jobs, with AI replacing high skilled professionals, there is going to be less and less for humans to do. We as a society, have to figure out a new way of dividing goods and services.
I suspect this sorting out will be violent, bloody, and prolonged. But I do think we will eventually figure it out.
I don't know how it will go. An actual Communist society because machines are the producers? Or a "Dune" society that outlaws thinking machines to protect jobs for people? Neither sound particularly appealing.
More and more the producers are machines, with machines designing and producing themselves. To whom do the fruits of their labor go to?
What class of people bought AI on margin? Add that to all the zombies on the S&P as the US hits a debt wall. An educated guess is over 50% of companies will go bankrupt.
We already know billionaires are too big to fail/jail so Trump is talking about needing $20 trillion for QE and plans to steal it.