AI is not propping up the American GDP, the American GDP is propping up the AI bubble.
American investors have too much money (I believe because of all the stimulus from covid) but can’t invest it into mature industries because the interest rate is too high making returns in mature industries insufficient.
On top of that, private equity is buying up non-AI businesses and basically de-investing them (reducing their fixed capital by selling off assets and squeezing cash flow).
So you have a massive supply of investment money and only one big outlet for it.
I’m not sure the AI bubble will pop and cause a recession. It seems to me as if cause and effect are being reversed. Like, there’s been a bunch of indicators and reports that have constantly been released showing that AI is useless for generating profits and yet the investments have continued.
Also, I think part of the effect is that there has been a state sponsored push to develop AI, so the investment in AI is safer than other bubbles. It’s not as if the American government will just let it’s misinformation and surveillance toys just die out.
American investors have too much money (I believe because of all the stimulus from covid)
Don’t forget the interest income payment from the rate hikes in 2023-2024 that were generating $1 trillion of net interest per year that mostly went to rich people. With such strong fiscal flows (7-8% of GDP) over the past 2-3 years where so much money has been pumped out and mostly given to the rich people, those money has got to go somewhere.
These are all free money created by US Federal Government that cannot be removed from the circulation unless taxed back by the government itself (ironically, what Trump is trying to do with his tariffs).
When you buy stock, the money simply switches hands to the people who sold you the stock. From an aggregate standpoint, if the stock market crashes, then the people who spent money to buy the stocks lose, but the people who sold their stocks don’t. It’s simply money that is changing hands. The dollars already spent by the government into existence won’t go anywhere, unless they are taxed back by the government itself.
(Of course this doesn’t preclude the misallocation of capital where investment is mostly concentrated in unproductive sectors while they could have been better invested in industries that improve the living standards of the people etc. and will have an impact on a real economy. A government that knows what it’s doing can easily offset this with fiscal spending, though the US finance capitalism is driven to extract from the national wealth rather than to build the nation itself)
It’s not the same as the 2007 subprime mortgage bubble where the asset price inflation was fueled by bank lending.
Of course, this also doesn’t preclude investors from borrowing from the banks to invest in the AI stocks but with the high interest rate, that’s not very likely.
A recession in the US is going to be caused by a contraction in government spending (which Trump is trying very hard to achieve) and the increasingly uneven distribution of income where the wealth is increasingly concentrated into the top 1% that drives a contraction in aggregate demand as poor people reduce their consumption, leading to a recessionary spiral where people start to lose jobs and have even less money to consume.
I should clear up a hole in my comment. I said both that mature industries don’t have good returns so investors aren’t investing into them, while also saying that AI profitability doesn’t really matter to investors. The difference between AI companies and non-AI companies right now is that AI companies have rapidly growing valuations and pools of fixed assets.
Sure, revenues are abysmal dogshit, but all that research, data centers, gas generators, the brand imagery, government contracts are worth money. The AI companies can keep absorbing investor money by … investing it.
Other mature industries on the other hand tend to not have much room for investing in much. I mean, they’re trying (mostly by investing in AI lol) but what massive jumps could you expect in mattress sales or mattress factories?
The real point where AI stops being an attractive investment imo will not be when people magically realize AI is useless, but when the AI companies stop building shit and releasing new models. That’s when investors will think there is no more room for growth.
AI is not propping up the American GDP, the American GDP is propping up the AI bubble.
American investors have too much money (I believe because of all the stimulus from covid) but can’t invest it into mature industries because the interest rate is too high making returns in mature industries insufficient.
On top of that, private equity is buying up non-AI businesses and basically de-investing them (reducing their fixed capital by selling off assets and squeezing cash flow).
So you have a massive supply of investment money and only one big outlet for it.
I’m not sure the AI bubble will pop and cause a recession. It seems to me as if cause and effect are being reversed. Like, there’s been a bunch of indicators and reports that have constantly been released showing that AI is useless for generating profits and yet the investments have continued.
Also, I think part of the effect is that there has been a state sponsored push to develop AI, so the investment in AI is safer than other bubbles. It’s not as if the American government will just let it’s misinformation and surveillance toys just die out.
This.
Don’t forget the interest income payment from the rate hikes in 2023-2024 that were generating $1 trillion of net interest per year that mostly went to rich people. With such strong fiscal flows (7-8% of GDP) over the past 2-3 years where so much money has been pumped out and mostly given to the rich people, those money has got to go somewhere.
These are all free money created by US Federal Government that cannot be removed from the circulation unless taxed back by the government itself (ironically, what Trump is trying to do with his tariffs).
When you buy stock, the money simply switches hands to the people who sold you the stock. From an aggregate standpoint, if the stock market crashes, then the people who spent money to buy the stocks lose, but the people who sold their stocks don’t. It’s simply money that is changing hands. The dollars already spent by the government into existence won’t go anywhere, unless they are taxed back by the government itself.
(Of course this doesn’t preclude the misallocation of capital where investment is mostly concentrated in unproductive sectors while they could have been better invested in industries that improve the living standards of the people etc. and will have an impact on a real economy. A government that knows what it’s doing can easily offset this with fiscal spending, though the US finance capitalism is driven to extract from the national wealth rather than to build the nation itself)
It’s not the same as the 2007 subprime mortgage bubble where the asset price inflation was fueled by bank lending.
Of course, this also doesn’t preclude investors from borrowing from the banks to invest in the AI stocks but with the high interest rate, that’s not very likely.
A recession in the US is going to be caused by a contraction in government spending (which Trump is trying very hard to achieve) and the increasingly uneven distribution of income where the wealth is increasingly concentrated into the top 1% that drives a contraction in aggregate demand as poor people reduce their consumption, leading to a recessionary spiral where people start to lose jobs and have even less money to consume.
Trump caused an increase in government spending during his last presidency. I expect the same to happen again.
I should clear up a hole in my comment. I said both that mature industries don’t have good returns so investors aren’t investing into them, while also saying that AI profitability doesn’t really matter to investors. The difference between AI companies and non-AI companies right now is that AI companies have rapidly growing valuations and pools of fixed assets.
Sure, revenues are abysmal dogshit, but all that research, data centers, gas generators, the brand imagery, government contracts are worth money. The AI companies can keep absorbing investor money by … investing it.
Other mature industries on the other hand tend to not have much room for investing in much. I mean, they’re trying (mostly by investing in AI lol) but what massive jumps could you expect in mattress sales or mattress factories?
The real point where AI stops being an attractive investment imo will not be when people magically realize AI is useless, but when the AI companies stop building shit and releasing new models. That’s when investors will think there is no more room for growth.