{"id":113592,"date":"2025-11-02T05:56:15","date_gmt":"2025-11-02T05:56:15","guid":{"rendered":"https:\/\/www.newsbeep.com\/nz\/113592\/"},"modified":"2025-11-02T05:56:15","modified_gmt":"2025-11-02T05:56:15","slug":"what-happens-when-the-ai-bubble-pops","status":"publish","type":"post","link":"https:\/\/www.newsbeep.com\/nz\/113592\/","title":{"rendered":"What happens when the AI bubble pops?"},"content":{"rendered":"

Every tech company now seems to have their own AI: Google Gemini. OpenAI\u2019s ChatGPT. MetaAI. Spending for AI is reaching record highs<\/a>, powering a big boom<\/a> for the stock market. Even the White House<\/a> wants in on the fun.<\/p>\n

So are we in an AI bubble \u2014 an overblown investment period that\u2019s bound to deflate? Yes, argues Paul Kedrosky, a partner with SK Ventures and a fellow at MIT\u2019s Initiative on the Digital Economy. But not the bubble everyone thinks we are in. \u201cAI is obviously a hugely important technology,\u201d Kedrosky told Today, Explained co-host Noel King. So what, then?<\/p>\n

It\u2019s the money going into the AI infrastructure<\/a> like data centers that concerns Kedrosky: \u201cWe\u2019re spending this prodigious amount of money on the underlying infrastructure for AI with probably no likelihood of recovering most of that cost, and a significant likelihood that most of those assets become worthless because of the speed at which they depreciate.\u201d<\/p>\n

What happens when the bubble pops? And can past bubbles tell us anything about what is to come?<\/p>\n

Below is an excerpt of their conversation, edited for length and clarity. There\u2019s much more in the full episode, so listen to Today, Explained wherever you get podcasts, including Apple Podcasts<\/a>, Pandora<\/a>, and Spotify<\/a>.<\/p>\n

How much money is going into these data centers?<\/p>\n

It\u2019s going to be on the order of trillions<\/a> now. Forecasts are in excess of $2 trillion in data center spending ahead. But an increasing fraction of the money that\u2019s being spent on all of these things that allow us to distribute AI, like electricity, is coming from debt. And debt comes with obligations. You don\u2019t get to just walk away from it. So that makes this moment even more perilous.<\/p>\n

If AI is so important, why does it not make sense for trillions of dollars to be rushing in? Isn\u2019t this what we should be doing?<\/p>\n

We should be. But the problem, of course, is that there\u2019s this idea of what\u2019s called a rational bubble. Everybody thinks they\u2019re doing the right thing, but when you add everybody\u2019s \u201cright thing\u201d together, you end up with a prodigious amount of waste.<\/p>\n

It\u2019s no different than if you go back to the 19th-century railroad bubbles in both the UK and the US. There was simply too much track, too many enthusiastic railroad builders building almost adjacent tracks to the same locations. And this led to an incredible amount of waste. But it also led to company failures and various market crises across the 19th century in the US and repeatedly in the UK. It\u2019s not as simple as saying, \u201cWell, this is important, so we should build it and not care what it costs and not care about the consequences.\u201d<\/p>\n

If so many smart people think that we are in a bubble, why is money still flowing into data centers and other AI infrastructure at the rate that it is? <\/p>\n

I\u2019m not convinced that many people think it is a bubble. As I talk to people in technology, the most common response I get is not only is this not a bubble, but it\u2019s probably the most important technology of our lifetime. We have an opportunity to build a super-intelligence, a god-like intelligence on top of all of these chips and buildings and this AI electricity thing we\u2019re creating. And to say we should slow down at this point, according to the technology community, is just a huge error. But there are people outside of technology who say, \u201cOh, this is an incredible amount of spending.\u201d The Bank of England said it<\/a>. Other people are cautioning about it, but not inside of technology.<\/p>\n

The United States and humanity broadly has had no shortage of bubbles throughout history. You mentioned the railroads; walk us through some famous American bubbles.<\/p>\n

The railroad is probably among the most prominent in the US and that was, again, an enthusiasm for the idea. The same thing happened in the \u201920s during electrification. In the 1920s we went from a single-digit percentage of rural areas having access to electricity, [to] by the end of the decade it was more or less ubiquitous. Everyone had access to electricity. But at the same time, that gave rise to this proliferation of utility companies, of ventures that were doing all kinds of questionable things in terms of overspending. You could argue that electrification and the frenzy around it gave rise to the stock market rise of the \u201920s, which led to the crash of \u201929 and helped precipitate the Great Depression.<\/p>\n

People are pretty familiar with the telecom and dot-com bubbles, but the closest historical analogy to what\u2019s happening now genuinely is railroads and electrification. In the same way that we don\u2019t need to have two sets of tracks to Philadelphia, we probably don\u2019t need the same number of companies delivering what are called these large language models, these AI models that people are using. These will naturally shrink.<\/p>\n

How destructive are bubbles and what do they tend to destroy?<\/p>\n

All of them do immense damage. It\u2019s a question of how big the bubble is and where the damage goes.<\/p>\n

So if you\u2019re just holding an index fund and thinking you\u2019re being very conservative, you\u2019re actually soaking in AI right now. If everything reverses, goes 20 or 30 percent in the other direction, you\u2019re much poorer than you were. That\u2019ll change your spending. And that has implications for recessions.<\/p>\n

Isn\u2019t it always the case that the bubble bursts and then what it leaves behind is, maybe not something beautiful, but something workable?<\/p>\n

That\u2019s kind of a line of patter from the technology community. But the reality is almost every financial, every technology revolution has caused huge damage and can take decades before we get back to where we were before. And as the famous line in economics goes, in the long run, it may work out, but in the long run we\u2019re also all dead.<\/p>\n","protected":false},"excerpt":{"rendered":"Every tech company now seems to have their own AI: Google Gemini. OpenAI\u2019s ChatGPT. MetaAI. Spending for AI…\n","protected":false},"author":2,"featured_media":113593,"comment_status":"","ping_status":"","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[20],"tags":[365,363,364,219,52126,374,300,111,139,69,49,145,1865],"class_list":{"0":"post-113592","1":"post","2":"type-post","3":"status-publish","4":"format-standard","5":"has-post-thumbnail","7":"category-artificial-intelligence","8":"tag-ai","9":"tag-artificial-intelligence","10":"tag-artificialintelligence","11":"tag-economy","12":"tag-explained-podcast","13":"tag-innovation","14":"tag-money","15":"tag-new-zealand","16":"tag-newzealand","17":"tag-nz","18":"tag-podcasts","19":"tag-technology","20":"tag-today"},"_links":{"self":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/113592","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/users\/2"}],"replies":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/comments?post=113592"}],"version-history":[{"count":0,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/posts\/113592\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media\/113593"}],"wp:attachment":[{"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/media?parent=113592"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/categories?post=113592"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.newsbeep.com\/nz\/wp-json\/wp\/v2\/tags?post=113592"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}