The AI bubble

I don't want this to be the same old sermon about AI. We're all aware of the problems it poses in our world, but I rarely see it discussed from an economic point of view. This is probably because those who talk about an 'AI bubble' tend to be market analysts and economists who start yapping like madmen about terminology you've never heard of and don't even know if it's in the Cambridge dictionary. Don't worry any further, my dear friend. As someone who loves Excel spreadsheets and analytical charts with data on the global market, I'll try to explain this to you in simple terms. As far as possible. I should point out that I'm not an expert and I may be mistaken. I'd appreciate any corrections if necessary, as I'd like to present the most accurate information possible.

But first of all, what's a 'bubble'? (I'm not referring to a globule of one substance inside another, usually gas in a liquid. I'm referring to an economic bubble).

A bubble is something that occurs in markets, largely due to speculation, characterised by an abnormal rise in the price of a product. The speculative process leads new buyers to purchase with the aim of selling at a higher price in the future, causing a continuous upward spiral that is far removed from any factual basis. The price of the product reaches absurdly high levels until the bubble eventually bursts, due to the start of massive selling of the product when there're few buyers willing to purchase it. This causes a sudden drop in prices, bringing them down to very low levels and leading to many debts. This is known as a crash.

Some past examples of economic bubbles, in case this definition hasn't yet familiarised you with the term: tulips in Holland during the 17th century reached such exorbitant prices that people even sold their houses to buy them. Eventually, there were no more investors willing to buy. I cannot say whether it was because of the bubonic plague or simply because there was no money, but then these colorful tulips began to be sold desperately at very low prices. And... Their economy collapsed. More examples? The .com bubble in the 2000s, the Wall Street crash of 1929 (the Great Depression), the 2008 housing crisis, and the cryptocurrency bubble in 2017, all of which show similar patterns of euphoria, overvaluation, and subsequent panic.

Now that that's clear, let's talk about the current AI bubble. Yes, indeed, it's clearly an economic bubble that's bound to burst (call me a conspiracy theorist if you want, I really hope you're right because if this is not wrong, it'll be a serious predicament).

My arguments? It's undeniable that the money circulating around the AI economy is driven almost entirely by hype. The hype says that this is a technology that'll revolutionise every aspect of society. However, in reality, AI companies are spending enormous amounts of money without a clear path to profitability. They're not even sure about what their products are for and many of these haven't worked in the applications for which they were designed — a clear example is AI making up information, a problem that could get worse with each new and increasingly unsustainable model. And saying that this is unsustainable isn't a weak statement. You see, even if everyone who uses ChatGPT (approximately 10% of humanity by the way) paid $20 for ChatGPT Plus, it still wouldn't be sustainable. At this point, they practically lose money every time you use it. Silicon Valley's money machine does not seem to be paying off. You can get your calculators out to check it for yourselves. And there's no turning back now. Just look at the AI investment figures for the “Magnificent Seven” or whatever these companies want to call themselves; for example, Microsoft has already invested more than $14 billion, and Nvidia's stock in AI is around $5 trillion.

Clearly, no company could resist owning a technology that will completely change humanity and earn them trillions of dollars. It's so tempting that even though they may consider a possible (very possible) catastrophic crash, not trying would leave them behind, and they've already invested so much that they can only look forward.

If the bubble bursts, not only will companies lose almost everything, but the economy, particularly in the US, will suffer a catastrophic blow. In theory, we'd be screwed. A worrying number of experts compare this hypothetical and foreseeable situation to the 2008 crisis I mentioned earlier. Yes, the global financial crisis triggered by the bursting of the property bubble in the United States and the subsequent bankruptcy of the investment bank Lehman Brothers, which led to economic recession, unemployment, foreclosures and bank bailouts. Sounds dire.

Perhaps we're all delusional and the bubble will never burst, and the people who have sold this fantasy will discover how to keep their new industry afloat. I don't have much hope, but if I look down from the future and reflect on the present, I'd dare to say that AI has brought more drawbacks than improvements.