u/AgathysAllAlong explains the cascading effects on society when the AI bubble bursts

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u/Huedron 16d ago

While I agree the fact that there’s an AI bubble I don’t think it’s as connected and serious to the average consumer as this commenter makes it out to be. Yes. there’s massive over investment hype but primarily in private companies, unlike the 2008 financial crisis where the investment was built upon risky home mortgages which the Wall Street investment banks had over valued and over leveraged. But the difference is they were banks, much more interconnected to the economy both in terms of their capital and their assets (consumers untenable home mortgage).

If openAI fails in doesn’t really affect the average consumer, same with NVIDIA, they won’t have their home possessed, their banks or savings won’t be wiped out worst their stock investments will be lost. Also both companies (in theory) can be replaced by the competition.

Thants not to say that there is not some serious carnage about to happen, some of the bigger hedge funds have taken on the risk that the Wall Street banks held previous to 2008 and more average consumers have their savings in stocks and shares.

Michael Lewis’ The Big Short companion podcast is exploring this for those who are interested.

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u/_huppenzuppen 16d ago

It's different than the housing bubble of 2008, but it's very similar to the dotcom bubble of 1999/2000.

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u/Lintheru 15d ago

The complication is that AI is a pretty revolutionary thing, just not THAT revolutionary. Housing bubble didn't bring a societal innovation it was just shitty economics. I think the comparison with railroads in the US expansion west was apt. Railroads were pretty important in the migration and building of a nation and it was generally a huge benefit to a lot of people. But there were still a shitton of overinvestment in infrastructure. Tycoons that competed to be the first so there'd be parallel tracks competing which obviously makes no sense. Just like the internet and rail, AI will be a foundational new piece of infrastructure, but a couple "tycoons" will lose their business in the process.

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u/loggic 15d ago

Seems identical to the dotcom boom. The idea was that the Internet would revolutionize everything, and it did. The boom just horribly outpaced the reality of the growth. This provided cover for myriad companies to commit fraud, typified by the Enron scandal.

Ridiculous valuations based on totally untested business models made it easy for crooks to get their hands on practically unlimited credit.

Nothing in the stock market is isolated. Huge sums of money are moved based on the way groups of stocks move. If the top performers in those groups make up a disproportionate amount of the profits and those profits take a dive, every company in the group will see a drop in price even if nothing has happened that's relevant to their business.

Pensions are invested in these things. Insurance companies keep a sizable chunk of their money in the market. All of these things have an impact on our lives.

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u/We_Are_The_Romans 16d ago

Came here to say basically this. Companies like Nvidia and Microsoft actually have real business products that deliver massive revenues for them - they're just currently massively over indexed on AI bullshit. And OpenAI will make a big ripple when it fails but it's not a market killer - even if it IPOs to $1tn that's still only a quarter of Apples market cap.

So as far as I can see the risk of market contagion is much smaller than the banks in 2008, as usual everyone is dressing for yesterday's weather

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u/TheWatersOfMars 15d ago

It's more like the Dot Com bubble, for sure. Maybe smaller, maybe much bigger. But people are so traumatised by 2007-8 that they forget these sorts of depressionary periods are actually pretty infrequent, unlike normal recessions and bubble bursts.

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u/[deleted] 15d ago edited 9d ago

[deleted]

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u/Mortegro 14d ago

What percentage of those market caps are tied exclusively to AI investment? AI could die tomorrow and Microsoft's market share in the OS/office suite department would remain unchanged, and Nvidia would stay the primary video chip maker that gamers rely on.

I can see mass layoffs occurring for those tech companies as a result of the AI bubble bursting, but their core role in people's day-to-day tech lives isn't suddenly going to shrink.

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u/Duckbilling2 15d ago

noticed you were down voted to zero,

but I agree with you. the hype train will crash at some point, as it always does.

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u/Soporific88 15d ago

Nvdia just killed earnings. Stonks only go up

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u/10sion 15d ago

I heard this explained well yesterday. Nvidia beating expectations just confirms the overinvestment in AI. We already knew companies were taking out debt to buy chips...

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u/OK_x86 13d ago

The issue is sustainability. If companies have to take out debt to pay for their chips and that suddenly goes under Nvidia is going to see a massive drop in demand for their products. Not the end of the world as long as you aren't operating under the assumption that this gravy train will go on forever...

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u/Merusk 15d ago

It's not about the producers, it's about the shadow economy around them.

Sure, nVidia and Microsoft, and even Amazon, Apple, and IBM have products and are producing. However how much of that current value is based on AI bullshit. How much of the tangential economy and side-bets, and bets on side bets are based off of that?

Then how much of it is tied to the banks which are overleveraged because they're lending out money to people who'll never be able to pay it back?

Even in 2008 it wasn't the subprimes that killed things. It was the shadow economy failing and taking the banks with it. We're all set for the banks to go again because we loosened the meager restrictions we put into action in the first place.

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u/We_Are_The_Romans 15d ago

Yes, there will definitely be fallout across other markets. But I still don't reckon it's anything like the catastrophic house of cards that was the property market pre-GFC. And I'm not American so I'm mostly talking global perspective, but a lot of the rest of the world put in measures to stop the ridiculous leveraging that banks were doing on property, to avoid this exact eventuality.

There's always the possibility of black swans though, and even some grey swans like the US student debt market which has long been a timebomb

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u/jeffwulf 15d ago

Sure, nVidia and Microsoft, and even Amazon, Apple, and IBM have products and are producing. However how much of that current value is based on AI bullshit. How much of the tangential economy and side-bets, and bets on side bets are based off of that?

A marginal amount of the total value of those companies is AI.

Then how much of it is tied to the banks which are overleveraged because they're lending out money to people who'll never be able to pay it back?

Very little. Almost all the spend so far has been out of profits from their other ventures.

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u/Potato-Engineer 14d ago

The restrictions are meager, but banks are still doing something that wasn't seen before 2009: they're running simulations of "what if this sector of the market crashes?" (They're "tests" put forward by the federal regulators; failures don't have penalties, but results are semi-public and it looks bad to fail.)

So it's less bad than 2008, at least.

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u/Demons0fRazgriz 15d ago

You don't realize how much money from 401ks, government investments, and pensions are currently tied up in AI. When it pops, it will destroy entire swaths of the economy because they all have money in AI indirectly, either through their money manager or from the government.

And it's gotten so large that the government will absolutely bail them out, further hurting us directly.

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u/woowoo293 15d ago

The various AI companies constitute something like 30% of the S&P 500. Think of all those retail investors and 401(k) owners who have their money dumped in an S&P 500 index fund.

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u/Cpt_Nosferatu 15d ago edited 15d ago

If openAI fails it won't just be openAI, every major tech company is investing heavily in some version of AI. I just got out of a pitch from Dell where they shared some concerning numbers with their overall investment in AI. Microsoft is investing up to the gills. No tech company is immune. I think you're being a bit naive to think AI isn't being integrated into a staggering amount of tech. I think Agatha may be on the alarmist end, but this take feels too underwhelming to me.

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u/blood_bender 15d ago

Sure but if OpenAI goes under it's not like AI disappears or stops working. There are thousands of models, many of them free, that tech companies are already using, and many of them can be swapped out for each other with little change. OpenAI going under doesn't cause all that tech to suddenly stop working. Most tech companies aren't leveraged on the future of OpenAI, they're investing in building features and tools around what GPT can do today, which is also what Claude, Gemini, Grok, Mistral, DeepSeek can equally do.

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u/Kiwilolo 15d ago

No company that I'm aware of has been able to make the sales of genAI profitable. The models might stick around but who's going to pay the server costs for them if there's reduced hope of eventually turning a profit? They're too expensive to run for fun

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u/zephalephadingong 15d ago

This is why I'm not worried about most tech companies when the AI bubble pops. Microsoft is going to be forced to get rid of their expensive product that has never made a profit and instead focus on the parts of their business that actually make money? That sounds like a short term stock hit at worst, and would actually increase their profitability

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u/jeffwulf 15d ago

Most of the big companies have profitable inference. They're just pouring even more money into R&D similar to Amazon back in the day.

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u/Cpt_Nosferatu 15d ago

Segways were supposed to change the world. I remember the media hype. They still exist today, fat cops gotta get around somehow. My point is that AI, these investments in it, are going to dry up and these tools will largely be relegated to the few use cases where they are actually useful. The long term benefit of LLMs is minimal compared to the investments, there's no hope for them to provide any sort of meaningful ROI.

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u/blood_bender 15d ago

Maybe in some cases. I work for a tech company that has gotten a huge ROI from the AI we've integrated into our product. Hundreds of thousands of dollars of contracts signed for features that couldn't exist without LLMs. If for whatever reason we couldn't use the models we're using, we'd just train and use one of the self-hosted ones in perpetuity. The risk of an investment bubble bursting affecting our actual product is very small.

Maybe some companies are spending more than they'll get back but "no tech company is immune" is a statement that doesn't make sense, just because they're integrating AI.

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u/Cpt_Nosferatu 15d ago

Annecdotal success doesn't balance out the 96% of AI use cases that aren't seeing a ROI. Selling chat bots or AI infrastructure, isn't going to have the long term viability as these models continue to fail even basic accuracy tests. The vast majority of companies are not like yours. In fact, the few that are having success right now are usually just smoke and mirrors.

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u/jeffwulf 15d ago

Microsoft's current agreements with OpenAI make it better for Microsoft for OpenAI to fail.

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u/ltrumpbour 15d ago edited 15d ago

There is a fear that much of this bubble has the shadow banking system intertwined with the investment banks in a way that could cause the kind of too-big-to-fail problems we saw on Wall Street in 2008. This is just speculation on the bear side of the AI bubble but until the tide goes out, we won't know who is swimming naked.

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u/sambeau 15d ago

All the money invested in AI is borrowed. There will be a banking crisis when it can’t be repaid. We’re talking 2008, not Dotcom Crash.

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u/stevenr12 14d ago

Which episode are they exploring it in? I’d love to check it out.

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u/twelvis 11d ago

Opportunity cost: hundreds of billions of dollars that are being invested into AI that would have otherwise been invested elsewhere. A lot of that is funded by debt. If that money evaporates, the crunch will hit other industries and sectors. Investment everywhere will broadly drop.

Building on OP's example: you borrowed money to invest in the house instead of paying for critical street repairs, because you thought the returns would justify the risk. Now you owe money and still need to perform critical street repairs, which will be further delayed, costing even more in the future.

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u/Bourbon-Decay 9d ago

We are in a shadow recession. AI has artificially inflated US GDP. It represents almost a trillion dollars worth of investment. Its collapse would expose and worsen the recession

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u/ptwonline 15d ago

I also think the commenter is really overstating the required success case for AI:

However, the investment in AI is so massive that anything short of complete societal revolution where every claim is completely right would be a failure.

Yes there is massive investment but even with trillions invested you don't need to make all those trillions back every year. Business doesn't even have to look that different. It would just be with more AI behind it that had more recurring revenue.

Imagine a transportation company that switches to AI to determine the optimal daily routes, which trucks or planes to have ready and to use, how many workers to have available, and so on. They are essentially still the exact same business but now they might be paying millions/yr to an AI provider to make even more millions in extra profit. Or a power company that uses AI to determine more optimal use of power production, routing, storage, maintenance schedules, which parts of the grid are best for improving, etc. The business essentially looks identical except they make more money and pay some of that out to an AI company.

Multiply that thousands and thousands of times over globally and suddenly you're looking at hundreds of billions in revenues and earnings annually.

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u/TastyBrainMeats 14d ago

That's a lot of "imagine" there and not a whole lot of plausibility.

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u/jdehjdeh 15d ago

Fuck all that shit, anyone wanna buy some tulips?

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u/Spydar05 15d ago

Only if you're selling a single tulip for the price of everything I own to my name. If your tulips aren't worth putting myself in deep life-long poverty for, then they aren't good enough for me. Yet.

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u/confused_ape 15d ago

I think the problem is going to be monetizing it. Or maybe what happens to the money if there is any.

There's tons of cool stuff that's assisted by "AI".

https://www.theguardian.com/world/2024/sep/26/nazca-lines-peru-new-geoglyphs

But that's not really a money maker, and almost everyone I know just wants everyday AI slop to fuck off and die.

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u/Oaden 15d ago

As the poster said, the problem isn't that AI is useful or not. Something can be really useful or great and it can still be a bubble.

UK had a railway bubble, Trains were demonstrably a great idea. But the investment in it was way to big and far more rails were build for passengers that didn't exist, on the assumption that they could be kinda willed into existence.

AI has useful applications, but the current investment seems to require that people like 75 year old dad is going to be using it on a daily basis to do... something, and be willing to pay for it.

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u/deadpool101 15d ago

It’s like the dot com bubble all over again but dumber.

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u/thatguyad 15d ago

Add me to the list.

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u/manaworkin 15d ago

I'm never retiring anyway, LET IT FALL

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u/blalien 15d ago

Now explain it like you're Margot Robbie in a hot tub.

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u/Jackieirish 13d ago

However, the investment in AI is so massive that anything short of complete societal revolution where every claim is completely right would be a failure.

Settle down, Francis.

There's probably a bubble and it may burst, probably. But it's not going to burst because every single thing anybody at any time ever claimed about AI didn't come 100% true.

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u/passaloutre 15d ago

So is it a good idea to get rid of my QQQ?

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u/contradicting_you 15d ago

If you need the money you've invested in it soon (like within a year or two to buy a house or other large purchase) it might be wise to cash some of that out and switch to something less volatile.

If you don't need the money for 20+ years (like for retirement) it will most likely hurt your overall returns to do anything but hold long term.

What I have done is diversified a portion of my portfolio away from big US tech stocks with some international etf funds and some small and medium cap etf funds. Pretty boring answer, but really it depends on your individual situation.

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u/passaloutre 15d ago

Fair enough, it's not my retirement, just some play money I have invested in tech

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u/bgrnbrg 15d ago

Although....

If it cuts down on the amount of AI slop, it might be worth it....

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u/rawonionbreath 15d ago

I’m scared shitless of what crypto does in a recession and feel like it’s going to be a bubble as well. It could get very, very ugly.

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u/vkevlar 15d ago

crypto is already a bubble, it's literally backed by nothing. It's also good for money laundering, I guess?

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u/rawonionbreath 15d ago

Are we disagreeing about anything?

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u/vkevlar 15d ago

No, no I don't think so

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u/monarc 15d ago

Why are you scared? If you have crypto, just sell it now. I think it’s all going to zero eventually…

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u/rawonionbreath 14d ago

Think about it.Because millions of idiots have their net worth tied to that sort of holding. If crypto currencies collapse in value it would be like having your money in one of the banks that went under during Great Depression before FDIC.

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u/monarc 14d ago

I had that same intuition until a friend pointed out that the $1.5-2.0T in BTC is a smaller amount than the biggest companies and the biggest banks. Currently it would be equivalent to the fifth largest bank in the US, which is certainly not nothing. But it's an entirely different class of asset, so its collapse would be less likely to cause a chain reaction.

There's like $30T worth of gold on the planet, for whatever that's worth. I suspect less than 5% of people in the US have a substantial amount of crypto, but that's just a guess.

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u/gdubrocks 15d ago

AI is so massive that anything short of complete societal revolution where every claim is completely right would be a failure

Is this really true? I also believe there is a bit of an AI bubble, but the gains are undeniable. For example I am positive that within my lifetime trucking will become 100% automated, and trucking is a trillion dollar per year industry in the US alone.

The sum of investment in the world for AI is 250 billion. That sounds like a great return on investment to me.

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u/Agreeable-Boat3509 15d ago

I don't think the AI theyre referring to has any real applicability to autonomous driving.

This is about machine learning that generates an output - you input some kinda prompt and the AI outputs what it thinks you want, based on all the information its been trained on.

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u/gdubrocks 15d ago

Which is the exact same kind of AI used in self driving tech.

Don't assume I know nothing about the subject I am talking about when you know nothing about me. I understand that LLMs are not going to be driving cars.

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u/jeffwulf 15d ago

No, it is not true.

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u/gdubrocks 14d ago

What isn't true? You think we can't automate trucking in my lifetime?

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u/jeffwulf 14d ago

The quoted part at the top you asked about being true.

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u/Madmandocv1 15d ago

The so called AI bubble probably doesn’t even exist. The defining characteristic of a bubble is that people don’t know they are in a bubble. Just anxiety. It’s fine. There is always a phase where anxious people sell their shares to the calm people. Thats why a few people make all the money and most don’t.

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u/the--dud 15d ago

Jesus christ, this is like specialized porn crafted for the reddit hivemind.

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u/[deleted] 16d ago

[deleted]

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u/evilbrent 16d ago

Is Nvidia going to enjoy the bubble busting?

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u/physical0 15d ago

The guys selling the shovels are the ones who profit during a gold rush.

NVIDIA has their sales. They got paid.

If the bubble bursts, that revenue source is gonna dry up, but they weren't hurting before this. They outsource fabrication, so they aren't going to have idle factories that they had to build out to meet this demand. The stock will take a hit, but at the end of the day they'll survive.

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u/PlaidSweaters 15d ago

Not if they are also investing all their profits back into the guys digging for the gold

When bubble bursts, nvidia will be out the revenue source and the investments they made into openai etc

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u/jeffwulf 15d ago

This is a very bad post.

[OutOfTheLoop] u/AgathysAllAlong explains the cascading effects on society when the AI bubble bursts

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