For years now, some of the biggest players in the AI space have been investing in smaller startups — which in turn use the same exact money to purchase services from the same large companies.
Investors have watched this circular financing with quiet but growing trepidation. After all, as the Wall Street Journal points out, if the AI bubble were to pop, the consequences could be dire. Now, with fears over a sudden collapse are as palpable as ever, such a “tangled web of AI bets,” as the newspaper puts it, could spell disaster.
The signs aren’t exactly hard to identify. Just last week, Google’s parent company Alphabet experienced the biggest drop in its market value in its history, wiping out well over half a trillion dollars in value.
The accompanying crash likely didn’t just send jitters across tech markets. Since the AI industry is effectively propping up the entire US economy, its failure could have far-reaching consequences to a public that’s increasingly skeptical of its offerings.
Since most of these companies’ fates are inextricably linked by circular financing, a major economic downturn or weakening demand could have cascading repercussions, especially considering much of the sector’s financing is based on debt.
Beyond the tech industry’s very bad week, data center operators aren’t looking much better. Nvidia customer CoreWave, which analysts have dubbed the “AI trade’s canary in the coal mine,” has also seen its shares decline over months, raising plenty of flags.
Despite the widespread unease, enormous data center expansion efforts are in full swing, major bipartisan backlash notwithstanding. It’s an unprecedented all-in that could jeopardize the entire economy if it were to collapse.
Even beyond the US, the circular financing is starting to worry investors sweat in Asia. The Bank of Korea recently warned of a “semiconductor version of Dutch disease,” an economic concept describing a booming sector that overtakes all other tradable market segments.
Yet the country is doubling down, with president Lee Jae Myung pledging today to “boldly invest in AI and future growth engines,” effectively doubling AI and chip spending for next year.
Only time will tell whether that’ll be the right move as more and more investors get cold feet.
More on the AI bubble: Stock Market Bloodbath Spikes Fears of AI Bubble Bursting
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