Brian Shilhavy
From The New York Times.
Excerpts:
We’ve been here before. As with so many other transformational inventions — railroads, electricity, the internet — outsize enthusiasm for artificial intelligence is supporting a level of spending that’s gotten ahead of plausible profit expectations, a defining characteristic of a financial bubble.
Now that the stocks of some A.I. builders and suppliers are wavering, we think it’s important to ask the next critical question.
What happens to the American economy if this bubble bursts? The damage could run deep.
It was just over a year ago when we argued that the enormous sums being poured into A.I. are reminiscent of the go-go internet era of the 1990s and the housing boom of the 2000s, both of which turned out to be financial bubbles whose bursting spilled over into the broader economy, leading to job and income losses that affected most Americans.
Now, we’re already starting to see signs that this latest boom may be fading: The tech-heavy Nasdaq index fell by more than 5 percent Thursday and is down nearly 10 percent since Oct. 1. Growing investor nervousness led the prominent A.I. lab OpenAI to dial back its latest funding round target by $10 billion.
What happens if the A.I. boom goes bust?
There’s a consensus building among investors, academics and market analysts that any downturn would be relatively mild, similar to what happened in the early 2000s, after the dot-com bubble burst.
The inflation-adjusted value of the overall economy, or real gross domestic product, shrank less than half a percent. And while unemployment rose, it was considerably lower than it was at the peak of the financial crisis.
Unfortunately, this consensus looks too optimistic.
First, the A.I. bubble is by all measures substantially larger than the dot-com bubble; the stock market has increased by more than it did between 1996 and 2000 and is currently worth 240 percent of G.D.P., versus 160 percent at the peak of the dot-com bubble.
This difference in magnitude means that if the stock market fell as much as it did over the course of the dot-com bust, the amount of lost wealth could translate into a reduction in real consumer spending that would be twice as large. That reduction would show up as a lower demand for goods and services, which could in turn reduce business investment, hiring and overall growth.
Our current economy is also more fragile than it was back in 2000.
Hiring has been sluggish and real wages are falling, the latter because of elevated war-induced inflation. The Federal Reserve has been gradually raising interest rates, leading to higher borrowing costs and potentially dialing back economic activity.
Additionally, today’s fiscal conditions and outlook are much worse. In 2001, the federal government ran a budget surplus of 1.2 percent of G.D.P.; today, it is running a historically large deficit of 6.2 percent of G.D.P. That could limit Congress’s willingness to inject even more borrowed money into the economy to offset any downturn.
To get a rough read on the magnitude of the damage triggered by what an A.I. bubble burst might do to the economy, we ran the same economic model that the Federal Reserve uses to simulate the workings of the macroeconomy.
The results confirmed our concerns.
Mapping a dot-com-style sell-off onto today’s markets would lead real G.D.P. to fall by more than three times as much as it did during the 2001 recession: 1.4 percent versus 0.4 percent. The unemployment rate would steadily climb from its current rate of 4.2 percent to above 7 percent.
Back when we first expressed our concerns about the stability of the A.I. investment boom, we noted that the companies building the A.I. models and the infrastructure to support them were mostly spending their own cash, meaning a bust would hurt them but not their lenders.
That’s no longer the case: $445 billion worth of A.I.-related debt, or 1.4 percent of G.D.P., was issued in the first eight months of 2026 tech stock.
Via https://nytimes.com/2026/11/06/opinion/nasdaq-tech-stocks-ai-bubble-dot-com-bust.html
