The AI boom marries dangerous elements of internet mania and the mid-2000s credit bubble, raising the specter of a financial catastrophe, Erik Gordon says.
“The next crash will look like the love child of the dot-com crash and the Great Financial Crisis,” the entrepreneurship professor told Business Insider by email.
Gordon, who teaches at the University of Michigan’s Ross School of Business, said the AI boom “inherited the hype and overvaluations of the dot-com bubble.”
While the nascent technology is likely to create more value than the internet, he said, company valuations are so extreme that “most investors will get killed, just like most of the dot-com investors.”
Gordon, who researches topics such as technology commercialization and AI, said the “losers” from an AI crash will extend beyond direct investors to buyers of index funds and exchange-traded funds, given that tech giants make up such a large part of the market.
The five largest US companies by market cap — Nvidia, Apple, Alphabet, Microsoft, and Amazon — are together valued at over $20 trillion, in no small part because investors expect them to be huge winners from the AI trend.
Borrowing binge
Gordon also raised the alarm on the scale of AI companies’ debts. They’ve “racked up a few trillion dollars of debt obligations on and off their balance sheets, and they’re not done borrowing,” he said.
If they’re unable to repay even a portion of their commitments, the “financial damage” will spread beyond stockholders to “burn banks, investment funds, and even insurance companies that made loans,” he continued.
“The contagion across financial markets will remind us of the GFC,” he added.
The dot-com crash wiped out thousands of startups, and even future world-beaters such as Amazon saw stock-price declines of over 90%.
The collapse of the mid-2000s housing bubble and the ensuing financial crisis saw Lehman Brothers go bankrupt, AIG and Bear Stearns bailed out, and the global economy plunge into recession.
Gordon has been a vocal skeptic of the AI boom for years. He told Business Insider in April that the market had “fabricated its own universe” where AI buzz trumps threats like war or inflation.
He said last summer that the huge amount of money riding on the AI theme meant more investors will suffer than in the dot-com crash, and “their suffering will be more painful.”
“This isn’t a fake-companies bubble, it’s an order-of-magnitude overvaluation bubble,” Gordon said in January 2022.
The S&P 500 slumped by around 18% over the next eight months, dipping below 3,600 points in September of that year. But it has more than doubled since then, reaching all-time highs of over 7,800 points this year.
Gordon isn’t alone in anticipating that the AI boom will end in tears. Notably, Michael Burry of “The Big Short” fame has been sounding the alarm on AI companies’ overinvestments, circular financing, aggressive accounting, and hidden debts.
However, tech leaders such as Nvidia CEO Jensen Huang and Tesla and SpaceX CEO Elon Musk have said valuations are more than justified given AI’s potential to supercharge productivity, corporate profits, and economic growth.
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