What Happens When the AI Bubble Bursts? MIT University Responds

The surge in investment in artificial intelligence has become one of the largest spending waves in technology history, but a new study warns that if these investments do not lead to the expected productivity growth, the bursting of the AI bubble could cause widespread damage to financial markets. According to this study, large tech companies need to increase their productivity by 2.7 times by 2030 to break even on their investments.

According to Mihan Blockchain, Jessica Wachter, a finance professor at Wharton and former chief economist of the U.S. Securities and Exchange Commission (SEC), estimates that Alphabet, Microsoft, Amazon, Meta, and Oracle will spend nearly $1.1 trillion on data centers by 2027. These calculations also take into account capital costs, a 15% return, and infrastructure depreciation.

What Happens If the AI Bubble Bursts?

Wachter and her colleague believe that large tech companies need a 2.7-fold increase in productivity by 2030 to justify these costs. If this growth does not materialize, the massive capital spent on AI infrastructure could lead to unprecedented misallocation of capital. Wachter described this situation as "the largest misallocation of capital in history."

Signs of pressure from these investments on companies' financial status are also evident. Alphabet faced a $5.9 billion shortfall in free cash flow in the last quarter; an occurrence that has not happened since the company went public in 2004.

Debt Transfers AI Bubble Risk to the Market

The potential problem is not limited to tech companies. Morgan Stanley estimates that more than half of the $2.9 trillion planned spending on data centers by 2028 will be financed through external funding. Thus, if the returns on AI investments decline, part of the risk could be transferred to the credit market and investors.

In one example, Meta transferred 80% of the shares of the Hyperion data center in Louisiana to the private equity firm Blue Owl Capital. Stein van Nuyvenburch, a professor at Columbia Business School, warned that such debts are finding their way into more parts of the financial market through pension funds and private credit instruments.

Gary Gensler, former SEC chair and professor at MIT Sloan School of Management, also believes that this wave of investment will eventually face a period of retreat, although the timing is uncertain; he described this situation as "a common bet of the capital market and the economy."

In the cryptocurrency market, Arthur Hayes, a market strategist, has proposed a different scenario. He believes that if a credit crisis arises from the AI bubble, the Federal Reserve may inject more liquidity into the economy to counter its effects; a scenario that, from Hayes's perspective, could drive the price of Bitcoin to one million dollars.

However, it remains unclear how and when this bubble might deflate. The main issue is whether the productivity growth resulting from AI can keep pace with the massive investments made in its infrastructure.

This content is provided for general informational purposes only and doesn't constitute financial, investment, legal, or tax advice. Any events, rewards, online promotions, or related information mentioned herein should not be considered a recommendation, solicitation, or invitation to purchase, sell, trade, or otherwise deal in any crypto assets. Crypto assets are highly volatile and may result in loss. The availability of WEEX services, products, and related events may vary by region. You are responsible for ensuring that your participation is in accordance with applicable local laws and regulations.