{"id":78899,"date":"2025-11-13T23:01:24","date_gmt":"2025-11-14T04:01:24","guid":{"rendered":"https:\/\/world.edu\/?p=78899"},"modified":"2025-11-13T23:01:24","modified_gmt":"2025-11-14T04:01:24","slug":"theres-an-ai-bubble-and-this-is-what-could-happen-if-it-bursts","status":"publish","type":"post","link":"https:\/\/world.edu\/theres-an-ai-bubble-and-this-is-what-could-happen-if-it-bursts\/","title":{"rendered":"There&#8217;s an AI bubble, and this is what could happen if it bursts."},"content":{"rendered":"<p><span dir=\"auto\"><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter size-full wp-image-78900\" src=\"https:\/\/world.edu\/wp-content\/uploads\/2025\/11\/AI-bubble.jpg\" alt=\"\" width=\"680\" height=\"379\" srcset=\"https:\/\/world.edu\/wp-content\/uploads\/2025\/11\/AI-bubble.jpg 680w, https:\/\/world.edu\/wp-content\/uploads\/2025\/11\/AI-bubble-250x139.jpg 250w\" sizes=\"(max-width: 680px) 100vw, 680px\" \/><\/span><\/p>\n<p><span dir=\"auto\">Booms and busts are\u00a0<\/span><a href=\"https:\/\/link.springer.com\/book\/10.1057\/9780230628045\"><span dir=\"auto\">a recurring feature of the modern economy<\/span><\/a><span dir=\"auto\">\u00a0, but when the value of an asset becomes excessively inflated, a boom quickly turns into a bubble.<\/span><\/p>\n<p><span dir=\"auto\">The\u00a0<\/span><a href=\"https:\/\/www.sciencedirect.com\/science\/article\/abs\/pii\/S0022199613001050?via%3Dihub\"><span dir=\"auto\">two most recent episodes of this kind<\/span><\/a><span dir=\"auto\">\u00a0were the dot-com bubble in the United States (1996-2000) and the housing bubbles that emerged around 2006 in various countries. Both ended in recession: the first relatively mild, the second catastrophically severe. The recent, dizzying increases in the stock prices of AI-related companies have led many investors to wonder: \u201cAre we witnessing another asset price bubble?\u201d<\/span><\/p>\n<p><span dir=\"auto\">It&#8217;s important to put the current AI boom into context. The share price of Nvidia, which makes many of the computer chips powering the AI \u200b\u200bindustry, has increased 13-fold since the beginning of 2023. Shares of other AI-related companies, such as Microsoft and Alphabet, Google&#8217;s parent company, have increased 2.1-fold and 3.2-fold, respectively. By comparison, the\u00a0<\/span><a href=\"https:\/\/es.wikipedia.org\/wiki\/Anexo:Compa%C3%B1%C3%ADas_del_S%26P_500\"><span dir=\"auto\">S&amp;P 500<\/span><\/a><span dir=\"auto\">\u00a0index , which tracks the performance of the largest US companies, has only increased 1.8-fold over the same period.<\/span><\/p>\n<p><span dir=\"auto\">It&#8217;s important to note that these AI-related companies\u00a0<\/span><a href=\"https:\/\/www.google.com\/finance\/quote\/NVDA:NASDAQ?window=5Y&amp;comparison=INDEXSP%3A.%20INX,%20INDEXFTSE:UKX,%20NASDAQ:AMSFT,%20NASDAQ:AGOOGL\"><span dir=\"auto\">are included in the S&amp;P 500<\/span><\/a><span dir=\"auto\">\u00a0, further widening the gap with non-AI companies. Therefore, it appears there&#8217;s an AI bubble, but this doesn&#8217;t necessarily mean a repeat of what happened in 2008.<\/span><\/p>\n<h4><strong><span dir=\"auto\">How a bubble forms<\/span><\/strong><\/h4>\n<p><span dir=\"auto\">The price of any stock can be broken down into two components: its fundamental value and the inflated value of the bubble. If the stock price is above its fundamental value, a price bubble exists.<\/span><\/p>\n<p><span dir=\"auto\">The fundamental value of an asset is the\u00a0<\/span><a href=\"https:\/\/rd.springer.com\/book\/10.1007\/978-3-030-00587-0\"><span dir=\"auto\">discounted sum of its expected future dividends<\/span><\/a><span dir=\"auto\">\u00a0. The key word here is \u201cexpected.\u201d Since no one, not even ChatGPT, can predict the future, the fundamental value depends on each investor&#8217;s subjective expectations. They may be optimistic or pessimistic; over time, some will be right and others wrong.<\/span><\/p>\n<p><span dir=\"auto\">Optimistic investors expect AI to change the world and for the owners of this technology to reap (almost) unlimited profits. Unsure which company will ultimately succeed, they invest in all AI-related businesses.<\/span><\/p>\n<p><span dir=\"auto\">Conversely, pessimistic investors think that AI is just a complex computer program, rather than a truly innovative technology, and they see bubbles everywhere.<\/span><\/p>\n<p><span dir=\"auto\">A third possibility is the more sophisticated investors. These are people who think, or know, that there is a bubble, but continue investing in the hope of riding the wave and getting out before it&#8217;s too late.<\/span><\/p>\n<p><span dir=\"auto\">The last of these possibilities recalls the\u00a0<\/span><a href=\"https:\/\/business.time.com\/2007\/07\/10\/citigroups_chuck_prince_wants\/\"><span dir=\"auto\">infamous quote<\/span><\/a><span dir=\"auto\">\u00a0from Citigroup CEO Chuck Prince before the 2008 housing bubble burst: \u201cAs long as the music is playing, get up and dance.\u201d<\/span><\/p>\n<p><span dir=\"auto\">As an economist, I can confidently say that it&#8217;s impossible for all AI-related companies to ultimately dominate the market. This undoubtedly means that the value of at least some AI-related stocks has a significant bubble component.<\/span><\/p>\n<h4><strong><span dir=\"auto\">Asset shortage<\/span><\/strong><\/h4>\n<p><span dir=\"auto\">Asset price bubbles can be\u00a0<\/span><a href=\"https:\/\/www.jstor.org\/stable\/1826989\"><span dir=\"auto\">the market&#8217;s natural response to asset shortages<\/span><\/a><span dir=\"auto\">\u00a0. When demand for assets exceeds supply (especially for safe-haven assets like government bonds), there is room for newer assets to emerge.<\/span><\/p>\n<p><span dir=\"auto\">This pattern explains the emergence, for example, of the dot-com bubble of the 1990s and the subsequent real estate bubble of the 2000s. In that context, China&#8217;s increasingly important role in financial markets\u00a0<\/span><a href=\"https:\/\/www.bis.org\/review\/r110221b.pdf\"><span dir=\"auto\">increased the demand for assets in the West<\/span><\/a><span dir=\"auto\">\u00a0: money was first directed to dot-com companies in the 1990s and, when that bubble burst, to finance housing through mortgage-backed securities.<\/span><\/p>\n<p><span dir=\"auto\">In the current context, a combination of factors has paved the way for the AI \u200b\u200bbubble: enthusiasm for new technologies, low interest rates (another indication of asset scarcity), and huge amounts of cash flowing into large companies.<\/span><\/p>\n<h4><strong><span dir=\"auto\">The bursting of the bubble: good, bad, and ugly scenarios<\/span><\/strong><\/h4>\n<p><span dir=\"auto\">At the very least, some of the soaring value of AI-related stocks is a bubble, and a bubble cannot stay inflated forever. It has to burst on its own or, at best, be carefully deflated through targeted government or central bank measures. The current AI bubble could end in one of three scenarios: good, bad, or ugly.<\/span><\/p>\n<h4><strong><span dir=\"auto\">The good news: boom, not bubble.<\/span><\/strong><\/h4>\n<p><span dir=\"auto\">During the dot-com bubble, many bad companies received too much money; the classic example was\u00a0<\/span><a href=\"https:\/\/en.wikipedia.org\/wiki\/Pets.com\"><span dir=\"auto\">Pets.com<\/span><\/a><span dir=\"auto\">\u00a0. But the bubble also provided funding for companies like Google, which (arguably) helped turn the internet into a productivity-enhancing technology.<\/span><\/p>\n<p><span dir=\"auto\">Something similar could happen with AI, since the current avalanche of investment could, in the long run, create something good: a technology that benefits humanity and, over time, generates a return on investment. Without the cash flow levels typical of a bubble, it wouldn&#8217;t be financed.<\/span><\/p>\n<p><span dir=\"auto\">In this optimistic scenario, AI, while it may displace some jobs in the short term (as is the case with most technologies), will ultimately be beneficial for workers. I also assume that, obviously, it will not lead to\u00a0<\/span><a href=\"https:\/\/www.bbc.com\/news\/uk-65746524\"><span dir=\"auto\">the extinction of humanity<\/span><\/a><span dir=\"auto\">\u00a0. For this to be the case, governments must introduce appropriate and robust regulations. It is also important to emphasize that countries do not need to invent or invest in new technologies, but rather adapt them and provide applications to make them useful.<\/span><\/p>\n<h4><strong><span dir=\"auto\">The bad one: a soft explosion<\/span><\/strong><\/h4>\n<p><span dir=\"auto\">All bubbles eventually burst. As things stand, we don&#8217;t know when this will happen, nor the extent of the potential damage, but a market correction is likely to occur when enough investors realize that many companies are overvalued. This stock market crash will inevitably lead to a recession.<\/span><\/p>\n<p><span dir=\"auto\">Let&#8217;s hope it&#8217;s short-lived, like the 2001 recession that followed the bursting of the dot-com bubble. While no recession is painless, this one was\u00a0<\/span><a href=\"https:\/\/www.nber.org\/research\/data\/us-business-cycle-expansions-and-contractions\"><span dir=\"auto\">relatively mild<\/span><\/a><span dir=\"auto\">\u00a0and lasted less than a year in the United States.<\/span><\/p>\n<p><span dir=\"auto\">However, the bursting of the AI \u200b\u200bbubble may be more painful because there are more households participating (either directly or indirectly through investment funds) in the stock market than there were 20 years ago.<\/span><\/p>\n<p><span dir=\"auto\">Although central banks are not meant to control asset prices, they may need to consider raising interest rates to deflate the bubble before it grows too large. The more sudden the collapse, the deeper and more costly the subsequent recession will be.<\/span><\/p>\n<h4><strong><span dir=\"auto\">The ugly one: collapse and fall<\/span><\/strong><\/h4>\n<p><span dir=\"auto\">The bursting of the AI \u200b\u200bbubble would be serious if it shared more characteristics with the housing bubble of the 2000s than we currently imagine. On the positive side, AI stocks are not houses. This is good because, when housing bubbles burst, the effects on the economy are\u00a0<\/span><a href=\"https:\/\/www.sciencedirect.com\/science\/article\/abs\/pii\/S0304393215000987\"><span dir=\"auto\">larger and longer-lasting<\/span><\/a><span dir=\"auto\">\u00a0than with other assets.<\/span><\/p>\n<p><span dir=\"auto\">The housing bubble not only caused the 2008 financial crisis, but it also triggered the collapse of the global financial system. Another reason for optimism is that the role of commercial banks in AI finance is much smaller than in housing, since a large portion of each bank&#8217;s money is perpetually tied up in mortgages.<\/span><\/p>\n<p><span dir=\"auto\">However, a key caveat is that we don&#8217;t know how the financial system will react if these large AI companies default on their debt. Alarmingly, this appears to be how they are\u00a0<\/span><a href=\"https:\/\/finance.yahoo.com\/news\/bank-america-just-issued-stark-152422714.html\"><span dir=\"auto\">currently financing new investments<\/span><\/a><span dir=\"auto\">\u00a0: a recent Bank of America analysis warned that large tech companies rely heavily on debt to build new data centers, many of which are intended to meet a demand that doesn&#8217;t yet exist.<\/span><\/p>\n<p><em><strong>Author Bio:<\/strong> Sergi Basco is Associate Professor of Economics at the University of Barcelona<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Booms and busts are\u00a0a recurring feature of the modern economy\u00a0, but when the value of an asset becomes excessively inflated, a boom quickly turns into a bubble. The\u00a0two most recent episodes of this kind\u00a0were the dot-com bubble in the United States (1996-2000) and the housing bubbles that emerged around 2006 in various countries. Both ended [&hellip;]\n&hellip; <a href=\"https:\/\/world.edu\/theres-an-ai-bubble-and-this-is-what-could-happen-if-it-bursts\/\" class=\"more\">learn more&rarr;<\/a><\/p>","protected":false},"author":33,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[3],"tags":[435577],"coauthors":[11733],"class_list":["post-78899","post","type-post","status-publish","format-standard","hentry","category-business-politics","tag-booms-and-busts"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.2 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>There&#039;s an AI bubble, and this is what could happen if it bursts. - World leading higher education information and services<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/world.edu\/theres-an-ai-bubble-and-this-is-what-could-happen-if-it-bursts\/\" class=\"yoast-seo-meta-tag\" \/>\n<meta property=\"og:locale\" content=\"en_US\" class=\"yoast-seo-meta-tag\" \/>\n<meta property=\"og:type\" content=\"article\" class=\"yoast-seo-meta-tag\" \/>\n<meta property=\"og:title\" content=\"There&#039;s an AI bubble, and this is what could happen if it bursts. - World leading higher education information and services\" class=\"yoast-seo-meta-tag\" \/>\n<meta property=\"og:description\" content=\"Booms and busts are\u00a0a recurring feature of the modern economy\u00a0, but when the value of an asset becomes excessively inflated, a boom quickly turns into a bubble. 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