“History tells us that at some point you get a retrenchment, and it’s just a question of when and how severe,” says Sloan’s Gensler. It could be that today’s $750 billion spending rate “goes flat” or decreases next year. Or, he suggests, “we’re now in 2028 or 2029, and then all of sudden they’re retrenching because they’ve got enough capacity.” But, he adds, “you can be pretty assured there’ll be a retrenchment.”
Though a so-called retrenchment might be inevitable, it’s worth keeping in mind that the fates of the financial bubble and the underlying AI technology revolution could be very different. Already, some Silicon Valley insiders are rooting for a crash; in a recent blog post the longtime venture capitalist Vijay Pande wrote that “the coming crash would be the best thing that happens to this technology.” The argument makes some sense. A crash could make AI investments more rational, calm the impulse to build billion-dollar data centers on every vacant field that CEOs fly over, and refocus investors on how to use the technology to create sustainable value.
But we should probably be careful what we wish for. After the bursting of the dot-com bubble at the beginning of the 2000s, hundreds of thousands lost their jobs, large and small companies alike went bankrupt, the economy of Silicon Valley and San Francisco was decimated (at least for a while), and the shocks sent the US into a mild recession in 2001. For the financial community and many tech workers, it was no fun.
Even more devastating for the economy and the average American was the great recession that began in late 2007. Comparing the financial engineering leading up to it and the methods deployed by hyperscalers today is sobering. So-called special purpose vehicles (SPVs) are back! If Columbia’s Van Nieuwerburgh is right about the dangers of letting investments from the hyperscalers get entangled throughout the economy, the fallout could be severe.
But technologies survived and even prospered in the aftermath of both downturns. The early 2000s, even in the face of the dot-com fiasco, were a time of great innovation and tech optimism. The froth came off the spending on silly technologies, helping to focus investments on more promising ones. It’s no coincidence that each of the hyperscalers rose out of the ashes of the crash or started up shortly after. The fiber-optic infrastructure built during the feverish telecom bubble that ran parallel to the dot-com one is still the backbone of much of today’s communication infrastructure; we wouldn’t have Facebook or Amazon or Google without it.
This time, however, we’re facing a unique risk: The huge financial investments by the hyperscalers have ensnared the future of AI itself with the fortunes of the massive data centers spreading around the country. The logic is founded on a deeply held belief about the power of scaling in AI; the bigger you build it, the smarter it gets. That might be true, but it’s unproven and a risky bet.
There are already plenty of red flags, from strong public opposition to the construction of new data centers to the competitive threat from cheaper, good-enough AI models to the rapid improvement of small, local AI models. None of these trends point toward a future dominated by frontier models housed in massive, billion-dollar data centers.
The financial bubble around the colossal spending by the hyperscalers will likely burst eventually—or maybe soon. It might be financially painful, but we’ll survive. Wall Street will survive. AI itself will survive, though it may look different and lose some of today’s hubris. The financial fate and future utility of the massive data centers fueled by trillions of dollars of spending, on the other hand, are far less certain.
