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In my recent writing about LLMs and AI, I’ve mainly focused on what it can do, what it is, what its potential dangers are. I haven’t focused as much on the pretty substantial evidence that we’re in the midst of an AI bubble. The entire U.S. economy is heavily dependent on the AI boom. Much of the rest of the economy is in a slump. That boom is based on cheap money and very high expectations for AI profits, just as the Fed is facing irresistible pressure to raise interest rates, which is to say, raise the cost of money. This whole question of an AI bubble gets talked about a lot. You probably know the basic outlines. What’s caught my attention is how just in the last week or so these questions, verging into assumptions about unsustainable spending, are bleeding into the tech and the Beltway political press.
First is this piece in Axios, which references a study by our friend Jared Bernstein and Ryan Cummings, now both at the Stanford Institute for Economic Policy Research. They have a new study out basically making the bubble case. Axios has this line in their write-up of the analysis: “They found that the companies would need to triple or quadruple their AI revenue next year and every year after that for the next decade for this to work out.” The “they” here is Alphabet, Amazon, Meta, Microsoft, Oracle and SpaceX — basically the non-“frontier” AI hyperscalers.
Needless to say, those are pretty wild growth rates to hit. And Bernstein and Cummings say it’s a race to growth that those hyperscalers seem to be losing. “AI firms are losing a race against time,” they write. “Investments are far outpacing profits, and while we may be wrong, we’re hard-pressed to see how the latter can catch up to the former.” You can see the details in the study here. These turn out to be only the beginning of the problems. They don’t factor in what seem like quite likely hikes in interest rates. My point here is less this information itself. There have been dissenting voices in the economics and, for lack of a better word, the AI skeptic space saying things like this for a long time. It’s who this information is being put in front of. In the case of Axios, it’s the DC elite.
Earlier this morning, I saw this in a newsletter from The Information, a closely read, fairly high dollar publication which covers Silicon Valley and tech.
The IPO market appears to have stalled, which could be a problem for Anthropic. Fitness ring maker Oura’s postponement of its IPO on Tuesday, citing “uncertainty in the IPO market,” followed similar moves by metals producer Amaero last week and Holtec Nuclear Corp. the week before that. Then there’s SB Energy, the SoftBank-controlled power developer for data centers, which made public its IPO paperwork on Sept. 1 (two days before Oura did so) but hasn’t yet begun to market the offering.
You don’t have to be a rocket scientist to figure out what’s going on. In its statement explaining its IPO postponement two weeks ago, Holtec mentioned “headwinds” including rising energy costs, trade tensions, military conflicts and rising interest rates. In short, it’s the world we live in. On top of that, Holtec—which sells to data centers—cited “uncertainty over data center development.”
The newsletter continues and expands on these points. And it’s mainly about non-AI startups. But as it notes in the lede, these issues are all issues for the AI sector, particularly Anthropic which is expected to be the first to do an IPO. It comes after other reports, like this one I flagged in The Information a couple days ago, suggesting that the big hyperscalers are grappling with soft demand.
It’s very hard to know when unsustainable spending, unmeetable profit predictions will catch up with the equities markets. It’s one of those things that doesn’t happen until it does. And the Trump-era stock market, with things like memestocks and much else, often drives money into knowingly absurd things. So sometimes Wile E. Coyote just kinda floats in the air forever. But the U.S. economy was never dependent on Gamestop’s valuation. And it’s hard to see how at least some air won’t start coming out of the balloon at some not-too-far-off point when you see the situation boiled down to simple math in the publications key decision makers, both on Wall Street and in DC, read.
