AI Boom Fueled by Debt Raises Fears of a Looming Market Correction
NEW YORK – The artificial intelligence (AI) investment surge, currently bolstering U.S. economic growth, is increasingly reliant on debt financing and faces potential headwinds from energy demands, sparking concerns of a important market correction. A collapse, even partial, could trigger a global recession far exceeding the impact of the early 2000s tech bubble, according too recent analysis.
Initially,major AI players like Nvidia largely funded the construction of massive data centers required for AI development with their own capital. Though, the influx of new companies seeking to capitalize on the AI boom is shifting the landscape.Projections indicate that roughly one-third of the $3 trillion expected to be invested in data centers by 2038 will be financed through credit from banks, investment funds, and other financial institutions, according to the New York Times.
This growing financial complexity is highlighted by the emergence of “circular financing” agreements. Nvidia is now directly providing capital to clients – including OpenAI, Anthropic, and CoreWeave - to build data centers, contingent on their commitment to utilize Nvidia’s processors, as reported by the Wall Street Journal. Beyond financing, the sheer energy requirements of these data centers present a significant logistical challenge.
The AI investment boom, alongside the wealth effect from stock market gains, has been a key offset to factors like tariffs, inflation, and restrictive immigration policies, The Economist notes.However,Harvard professor and former IMF chief economist Gita Gopinath calculates that a stock market shock comparable to the bursting of the tech bubble could erase $20 trillion in U.S. household wealth and subtract at least two percentage points from economic growth, likely triggering a recession.
Foreign investors stand to lose over $15 trillion in stock market value, exceeding the $4 trillion loss experienced during the tech bubble. This would disproportionately impact already indebted and economically vulnerable developed nations.
Despite the potential for a painful correction,analysts suggest a market downturn wouldn’t necessarily halt the AI revolution,drawing parallels to the internet’s survival after the tech bubble burst. The IMF has recently noted the stock market’s somewhat “jovial” trajectory, suggesting a correction might potentially be inevitable and could provide a necessary period for readiness.
