According to reports, a number of officials have said that the discussion of the AI bubble and the idea of it bursting like the housing and dotcom bubbles is unlikely, but still say the investment in a new, unproven technology with unknown returns, as well as changing financing structures and the use of debt, means that central banks are more interested in the technology.
Speaking with Reuters, Federal Reserve Bank of New York president John Williams said this wasn’t a bubble, but instead that enthusiasm for the technology and working out its benefits is the cause of the volatility.
“I don’t see this as a bubble kind of situation,” he said.
“What we’re seeing is a very high level of excitement, enthusiasm around new technology, around AI.
“Investors are trying in real time to solve an almost intractable problem, and that is how big are the benefits of AI going to prove to be.”
Williams also touched on the increased borrowing being used to support investment, attempting to calm concerns as those loans are being managed by companies with high revenue.
“I’m not as worried about the financial stability from the leverage right now,” he said.
According to Apollo chief economist Torsten Slok, the data centre buildout is still “less than half the size of the housing boom”, and the investment pace compared to gross domestic product (GDP) with AI is faster than housing as the global financial crisis approached.
However, other Federal Reserve members are less bullish about the AI boom.
Kansas City Federal Reserve president Jeff Schmid said last week that the industry growth could be a concern, particularly the flow of loans and funds and how links could mean that one problem could spread.
“I would argue that, that there [are] some signs that we have to really start to talk about that on a macro level, is this industry becoming another too big to fail?” he said.
“Does the circular motion of a commitment, let’s say a contractual commitment to a data centre to an energy provider … to a community that it serves, is that, is that circle getting too leveraged? And if you get a spark that starts a flame, what happens?”
Back in July, the European Central Bank also expressed concerns, including those mentioned by Slok.
“If AI overdelivers, it will impact financial stability. If AI underdelivers, it will impact financial stability,” said Slok at one of the main panels during the annual meet in Portugal.
A successful AI could result in major unemployment and create major instability in the economy, as nobody can afford to spend anymore. However, if AI fails, the major investments in it will also fail, creating economic issues.
“The internet proved to be better than anybody imagined, created whole new businesses, but we still got the dotcom bubble,” said Bank of Canada governor Tiff Macklem.
“It doesn’t mean there can’t be a period where the market gets ahead of itself, and you see an entrenchment.”
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