The rising threat to the global financial system

Until now, questioning of the boom in investment in artificial intelligence has largely been confined to whether it constitutes a stockmarket bubble. Increasingly, the conversation will shift to whether that boom represents a threat to financial system stability. The first phase of the sector’s development has been largely, albeit not entirely, equity funded, with the mega techs – the so–called “hyperscalers” like Google, Microsoft, Meta Platforms and Amazon – funding their massive investments in chips and data centres from their massive cash flows. Between them, those companies will spend $US375 billion ($577 billion) on AI infrastructure and chips this year and closer to $US450 billion next year. Given their cashflows, balance sheets and pristine credit ratings – between them, they had little to no net debt when this splurge in AI spending started – they can afford their investments. There are others, like OpenAI and other AI start–ups, that are making massive commitments – in OpenAI’s case about $US1.4 trillion – without the funding for them in place, relying on access to the equity markets and, to some degree, on circular finance and financial engineering – securing funding from chipmakers, for instance, in return for agreeing to buy the equivalent value of chips.