Every since Greenspan took over the Fed and the 87 crahs when they figured out their playbook, the US has only had unavoidable stock market crashes. The Fed is always there to juice markets higher and to jump in at the least sign of a normal (pre-Greenspan) market correction.
But sometimes the irrational stupidity overwhelms even the Fed, because they are both stupid and ideologically unwilling to ever force a correction. This happened twice: the dot-com boom and crash and the Mortgage backed security boom and crash (if we bundle shitty mortgages based on lies together, they become not shitty, because we’re pretending they aren’t all basically the same thing!)
Now we’re going to get the AI Boom crash. I’m well over 90% on this. The AI booms is in the “wildly stupid over-claiming” stage. It’s not that token based AI isn’t a real tech, or that it doesn’t have some uses, but the claims of it completely changing everything (replacing a third of the workforce, acting without human help to run things, being able to cure cancer and make huge theoretical breakthroughs) are obvious over-reaches. So far every academic study that comes in shows that AI isn’t even good at the one thing everyone anecdotally agreed it was good at: writing code. Right now it seems to mainly be a good way to cheat at university, to have a fake relationship, or to bypass Google’s shitty search (which is what I use it for.) It hallucinates, the hallucinations cannot be removed because they are integral to the tech, and the code it produces, even when it works, is a huge mess that will cause massive maintenance issues.
In addition:
- Since it doesn’t actually mostly reason, it requires data sets bigger than all the data in the world if it is to keep improving;
- If it uses the data it itself produces, it experiences model collapse.
- None of the American AI companies make money per query. Every query costs more than they can charge.
- It requires a vast build-out of energy and data centers, of the “over a trillion dollars” variety. There literally isn’t enough money to pay for OpenAI and Anthropic’s dreams, and there isn’t a product at the end of it that could pay back all that money.
- About 40% of the US stock market is now based around NVidia and the AI companies.
- NVidia has now invested in Open AI, so that they can turn around and buy more NVidia cards.
- The Chinese offer an open source AI which is almost as good and with costs somewhere between one fifteenth and one-thirtieth as much, so that it might actually be profitable AND since it’s open source, Trump can’t have a mini-stroke and decide to cut you off at his whim.
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Throwing all this money at AI if it really was the epochal “tech to end all techs, the singularity, dude” that the tech-bros claim it is might make sense. But I don’t see the evidence that this is the case, and even if it is, why not use the Open Source Chinese variety?
In fact, my guess is that this version of AI, based on this model and this generation of chips, is not even as big a deal as the internet was. Everyone was right that the internet was going to be HUGE, they just over-invested before it was and before people knew who the winners (Google, Facebook, Amazon) were going to be.
But so far AI doesn’t even look as important as the internet, but the spend is way larger than the internet build-out of the turn of the millennium.
But even if AI turns out to be a HUGE deal, it’s going to crash out of this bubble and we’ll find out later who can make money doing what.
The Fed will paper the AI market crash over, making hundreds of billions or even a trillion out of thin air to save the rich from their own stupidity and greed. Again. But this will be the LAST crash the Fed will be able to save the capitalists from. The one after will either wipe the capitalists out, wipe out America, or both.
Feral Finster
“The Fed will paper the AI market crash over, making hundreds of billions or even a trillion out of thin air to save the rich from their own stupidity and greed. Again.”
This much is obvious.
“But this will be the LAST crash the Fed will be able to save the capitalists from. The one after will either wipe the capitalists out, wipe out America, or both.”
We hear that before every big crash. What makes you so sure?
bruce wilder
I am glad you laid down a marker on this. It is so obviously coming.
Like you, I called the GFC and did so in late 2005, early 2006, when I was commenting on Mark Thoma’s blog almost every day. And, reading Calculated Risk every day — it didn’t require any personal genius, just being well-informed, which CR made me. It was like watching a train wreck. (The thing that makes a train wreck so surreal to watch is that you know no one can swerve.)
The weird part to me in retrospect was the pervasive woocoodenode, afterward. The powers-that-be brought in Bernanke rather forcibly and in a big rush, which was a big tell that someone with real power knew what was coming.
This time, it is much harder to read — for me at least. Partly because I am not so well-informed about a much more complex and unprecedented situation. I have been studying my basic economics and finance, but all it accomplishes is to confirm that a fundamental regime change is underway. And, to make me aware of strange subcultures of monetary reform living among the ex-hippies.
The AI bubble is ridiculous froth of course. What has the Powers-That-Be frightened is China, deflation and the collapse of dollar hegemony. Of course.
What scares me is that the Not-so-bright are aware, too, and believe crypto, Central Bank Digital Currency, RealID add up to a solution. Maybe war with Russia thrown into the mix. Or counter-revolution against open-borders immigration?
The last time, in 2005-9, Job #1 was to out flank righteous indignation about pervasive fraud so the ill-gotten gains could stay gotten and no reform that meant anything could be instituted. A simple story really.
Now, there isn’t even mind-space for a righteous reform, as far as I can see. There is scarcely a memory in the U.S. that a left ever existed and all the populist energy is leaking out on the right. All I can think is that line from GOT: “chaos is a ladder”.
Forecasting Intelligence
Agree entirely Ian. Great post.
Jefferson Hamilton
“But this will be the LAST crash the Fed will be able to save the capitalists from.”
Why?
different clue
I just hope AI crashes all the way to ground level before the transhumanists ( and other secret-agenda AI pushers) are able to push the earth beyond all the climate tipping points of no return.
It is worth exterminating the economy to save the ecology, if that is the choice we are forced to endure.
WangoTango
Never underestimate the power of the bailouts. They are all there is left.
different clue
I too will claim that I had an idea that something really bad was going to happen before the GFC of 2008. I can’t prove that of course.
But here is my claim and my reason. I used to watch CSPAN when I still had cable and cable still showed CSPAN, before the Great Degradation of Comcast Cable. I saw Bernanke on there talking to the Congressmen, and right when he was about to explain why things were stable and nothing bad was happening or would happen, his voice cracked and almost broke from barely contained abject fear. Since a brilliant intellectual with big degrees like Bernanke thinks he is smarter than any 500-or-so Congressmen gathered in a room, I knew he wasn’t afraid of the Congressmen. So would could make him almost panic for a second or two before he collected himself?
He must be seeing something very big and very bad over the far horizon and coming our way. I had no idea what he was seeing or what it would be, but I could tell that he saw it, and he almost went into lose-it freakout before he recovered his poise.
That’s my claim that I knew “something bad” was going to happen . . . because I saw/heard that fractional second of terror emanating from Bernanke.
Mark Level
I believe you are correct. AI is the new Tulip Mania Bubble, has been for some time. Decades since I read about the Tulip thing, but evidently they became a speculative item and at one time a single tulip (accd. to what I read) could cost as much as a good sized house. Pump and dump, go USA baby!!
And here’s a tangential thing I want to vent on. How much can Trump spit in the face of his followers and still have any popularity. Jeffrey St. Clair recently did a long list showing Trump is deeply unpopular in a majority of Red states. He is now spitting in the CHUDs faces, openly. A couple obvious examples– 1. In 2016 he ran to the Left of $Hrillary on foreign policy (Not hard to do, “We came, we saw, he DIED! Wahahooo haha!”) and demolished Jeb and the Bush Dynasty. Jeb later whined, convincingly, “I had no political viability”, his moron brother destroyed it. Tens of millions in corporate donations and he got 1 delegate at the RNC!! So NOW Trump is best buds with Bush Jr’s shoe-cleaner (with his lips) Tony Blair, aka Tony B.liar to the Brits who hate him, to co-head his Gaza “Peace” (sic: Final Solution) Committee. The Rethuglican right hated Bush and DJT pretended to be “different”. Nope, a fatter carbon copy.
2. I just saw in my Firefox “pocket” that Trump is teaming up with and promoting Pfizer!!! https://www.npr.org/sections/shots-health-news/2025/09/30/nx-s1-5558432/drug-prices-trumprx-pfizer?utm_source=firefox-newtab-en-us This is so obviously a criminal scam, it’s not even hidden. Ironically NPR reports it, but I doubt it’ll make their Pod People admire Trump for promoting Pfizer. Why have the heroin addict/ clown RFK Jr. as your MAHA expert being denounced by the Libs and meanwhile you cut a criminal deal with Pfizer.
Biden sure betrayed and shat on the few actual “progressives” in the Dimmie party, didn’t matter. Will it matter in the case of the Red Meat R’s– I am guessing yes. He’s about to burn all this shit down evidently. At this point it looks like the late shock artist (he was a crappy musician so he got audiences via self-mutilation, scatology etc.) GG Allin is running things. Herman Cain died in vain!!
Ian Welsh
If anyone cares the proof that I predicted the financial collapse is in the wayback machine. Or Sean-Paul can attest and thousands of people read the article.
Feral: I didn’t say that before the last two crashes. Why I am (fairly) certain is that doing so requires either near autarchy OR currency privilege and when the next one happens the US will have neither. Of course they can print the money anyway, but if they do it will have horrific consequences.
Purple Library Guy
I’ll take a stab at “why”: I’m thinking that the main reason the US central bank can get away with just throwing unimaginable amounts of money at this kind of problem is because the demand for US dollars has traditionally been very high and global because of the whole reserve currency thing, and because of the “flight to safety” psychological thing, where in the past economic crises, EVEN ONES CAUSED BY THE US, have resulted in panic buying of US dollars. Both of these patterns are waning; I think even doing it this time is likely to have a lot more consequences than in the past.
By the time we get to the next more-or-less-separate crisis, the dollar will certainly have much less room to maneuver, and money-printing on that scale all at once in a public way will likely result in a major inflation shock as the usual buyers just . . . don’t.
There are other issues, though–the AI crisis is a weird one. I mean, it feels oddly detached from the real economy, and yet I get the impression that the AI bubble grew in the first place as a process of desperately papering over a bunch of other economic weaknesses. When AI goes down, it could cascade into a bunch of other failures, and while a big bailout might sort of fix the AI thing by itself, who knows if it will be enough to deal with the other ones. Like, if the confidence fairy goes away, what will happen to crypto? Property, including commercial? Various kinds of debt, like student? How many USians are on the edge of not being able to pay medical insurance; if they stop, what does that do to overleveraged private-equity medical-stuff companies? There’s a bunch of stuff that could go wrong; if the music stops for AI we may discover there’s a lot more than one chair missing as we rush for the seats.
Feral Finster
“I didn’t say that before the last two crashes. Why I am (fairly) certain is that doing so requires either near autarchy OR currency privilege and when the next one happens the US will have neither. ”
I believe you regarding predicting the last two crashes. What i learned from those crashes (I predicted them as well) was that people of influence and authority worldwide (China included) do not want the current system to fail and they will do whatever it takes to prevent it from failing.
Us peons don’t count. We never did.
Ian Welsh
Back then (almost) everyone needed the US. They may still. They won’t next time.