The AI Bubble and Counterfeit Money

I heard people who read the column I wrote last week on the AI bubble complain that, by rooting for its collapse, I was hoping for the failure of the U.S. economy. Nothing could be further from the truth.

The logic of a run-up in asset prices being a bubble is that it is not grounded in reality; it is fake. The best analogy would be counterfeit money. Suppose some brilliant person devised a way to make up trillions of dollars of counterfeit money that we would all accept as real money, because we couldn’t tell the difference.

While the counterfeiter was working at their printing press, it might actually look like a good thing for the economy. After all, they and their friends would be buying all sorts of things with their counterfeit money. This would be driving demand in the economy and creating jobs. If someone exposed the counterfeiters, this demand and the jobs they create would disappear.

This is all true, but a deeper look shows the darker side. First, they don’t just create demand, they also drive up prices. This can be seen very clearly with the AI bubble.

Most immediately, data centers are massive power hogs. They are the main reason electricity prices have gone up more than 7.0 percent in the last year. Electricity inflation is likely to be even more rapid in the year ahead as Trump cancels wind and solar facilities that were supposed to come online in the near future.

In addition to driving up electricity prices, these data centers also generate pollution. This is not just the global impact of greenhouse gas emissions, but also the local impact of pollutants from coal or gas-powered plants. Also, the data centers are huge water hogs, requiring millions of gallons annually for cooling the computer systems.

Without an AI bubble, we would be building data centers at a much slower pace. And they would be doing far less damage to the environment. And the workers building the data centers might be building things we need more, like housing.

There is also inflation resulting from the fortunes that AI has generated due to the run-up in AI-related stocks. Big shareholders have the ability to buy more and bigger homes. This is certainly a factor behind sky high house prices in desirable cities like New York, San Francisco, Seattle, and Los Angeles.

These cities do all need more housing, but the fact that multi-millionaires can afford huge houses and multiple huge houses, surely also plays a role. If their AI stock prices fell back to earth maybe they would only be able to afford a somewhat normal very rich person’s house and maybe just one or two, rather five or ten.

And there would be less money devoted to all the high-end services devoted to the ultra-rich gang. That means fewer doctors and health care personnel committed to elaborate cosmetic surgeries, leaving more room to provide healthcare to normal people. And we would have fewer high-end restaurants, high-fashion stores, and other businesses catering to the whims of the rich and very rich.

And the AI gang would have less money to buy politicians and media outlets to enrich themselves even further. A good crash of the AI bubble, along with crypto, would give the rest of us more of a fighting chance to save democracy. Letting the rich get so much control over the means of communication was a political failing of catastrophic proportions, but there may still be an opportunity to set things right.

Anyhow, we can’t know when or how the AI bubble will burst. But no one should ever be hesitant to hope that a bubble will burst. Perhaps I and others have misidentified it as a bubble, but if we are right in that characterization, the sooner it bursts, the better. No apologies.

This first appeared on Dean Baker’s Beat the Press blog.

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