Warning: AI is Already Too Big to Fail

I’ve written a lot recently about our economy’s AI bubble, and two things happened recently that should be viewed as blinking red lights, in my opinion.

Nearly every economist agrees that if it weren’t for the AI boom, we would already be well into a relatively deep economic recession. As I've previously noted, a staggering 80% of this year's stock gains and 40% of GDP growth are being driven by AI-related investments. Growth in construction is being driven by the near-endless demand for new data centers to further increase compute power, and a circular economy in which the big players in chips, data centers, and AI platforms are swapping funding commitments is being read as an increase in value (the stock prices are rising), even though there exists little evidence that the underlying value to support the gains exist.

The so-called magnificent seven stocks—Alphabet (parent company of Google), Amazon, Apple, Meta (parent company of Facebook and Instagram), Microsoft, Nvidia, and Tesla—currently account for a little more than one-third of the S&P 500’s total market capitalization. What’s more, their total market capitalization relative to earnings suggests it is a massive overstatement of their actual value. If price discovery in the market were to correct this inflation of asset values, not only would these companies be in trouble, but it could send the entire U.S. economy into a death spiral.

Nvidia recently became the first company in history to reach a $5 trillion market cap. This is wholly a result of the AI race, as the company's value has increased 12-fold since OpenAI launched ChatGPT in 2022. That growth is like adding another Apple to the global economy. 

Sam Altman, CEO of OpenAI, recently appeared on the podcast Conversations with Tyler, hosted by economist Tyler Cowen. Cohen was concerned about the too big to fail aspect of AI, and Altman said something I found telling.

"At some level, when something gets sufficiently huge, whether or not they are on paper, the federal government is kind of the insurer of last resort, as we’ve seen in various financial crises, an insurance company screwing things up. So, I guess given the magnitude of what I expect AI economic impact to look like, sort of, I do think the government ends up as like the insure of last resort, but I think I mean that in a different way that you mean that and I don’t expect them to actually be like writing the policies in the way that maybe they do for nuclear."

Let that sink in. The most significant player in AI believes the federal government will backstop the industry’s losses, and without being involved on the policy end, as the industry has fought tooth and nail to avoid any regulation.  Before you think, That’s outrageous; the government should just let these companies fail, remember what I said earlier about their share of growth in our economy and its overall value. If they go down, your 401(k) or the assets underlying a pension go down with it, as ultimately will the value of assets like homes and even the dollar itself, meaning your savings also lose value. All of that will happen at a time when the growth that was even falsely injected into the economy abruptly comes to an end. It would be an economic armageddon.

Michael Burry is a successful investor who is largely credited with being among the first to recognize the housing bubble of the early aughts and then find a way to bet against the soaring market to the tune of hundreds of millions of dollars. Christian Bale portrayed him in the 2015 film The Big Short, which is based on the excellent book by Michael Lewis that tracks the causes of the subprime mortgage crisis and financial collapse that followed.

Burry is once again sounding the alarm, noting that these companies are extending the depreciation of their assets (in some cases twice as long) in a way that runs contrary to the nature of tech assets, which become obsolete much faster than the underlying assets of most other industries (chips and servers depreciate much faster than investments in assets like heavy equipment or factory robotics).

Burry takes five companies—META, Google, Oracle, Microsoft, and Amazon—and calculates that they will understate depreciation by nearly $200 billion from 2026-28, at which point he believes they will have overstated earnings by between 20-30%. If you are familiar with the Enron scandal that took down Arthur Andersen (causing many people in Sarasota and Manatee counties to lose their jobs), what Burry is alleging isn’t dissimilar to what caused its collapse; it is just on an infinitely larger scale.

Burry just shuttered his hedge fund, Scion Asset Management, and says he will have more details on the AI bubble and his future plans on November 25. Stay tuned. Meanwhile, take note of how cozy the CEOs of these companies have become with the Trump administration, how defensive they are toward any suggestion that they might live up to the hype, and what the promise of this unparalleled investment has so far proven to be: AI slop videos, the displacement of many entry level jobs, chatbots that have encouraged suicide, and Altman's suggestion that personalized pornograghy is on deck.  Oh yeah, and there's also that major cyber-espionage campaign that targeted roughly 30 global organizations across sectors, including prominent tech firms, financial institutions, chemical/manufacturing firms, and government agencies that Anthropic recently reported. 

Let's turn back to regulation. Recall that the so-called big beautiful bill initially included language that would have preempted any state-level AI regulation. That was ultimately scrapped because too many lawmakers were already facing angry constituents who opposed data centers coming into their communities, threatening resources like electricity and water. The House brought it back in the bill that reopened the government, but it died in the Senate. Now, President Trump is suggesting he will try to do so through an executive order to prevent "woke" states from giving us "woke AI."

Trump wants a small number of tech billionaires to make existential decisions for all of us, including controlling the dials that govern how AI models function. Elon Musk famously faceplanted when Grok became "MechaHitler" after adjustments were made to ensure his AI product was less "woke." After its latest updates, Grok is now telling users that Musk "ranks among the top 10 minds in history, rivaling Divinci or Newton." If that were not laughable enough, it also says of a man whose body looks like a bowl of mashed potatoes stuffed into a sock, that "his lean and wiry physique, while not Olympian, places him in the upper echelons" and that he "edges out NBA legend Lebron James in holistic fitness." Right.

If AI solves the climate crisis, cures cancer, and finds a way to make everyone wealthy, as Musk recently suggested, perhaps it will have been worth putting all of our eggs in one basket and cooking the Earth while doing so. Don't hold your breath for that spread the wealth part, however. The thing that gives Musk, Altman, Peter Thiel, Bill Gates, Alex Karp, and other tech billionaires their power in society is wealth stratification. The more people who are scrambling to put food on the table and keep a roof over their heads, the more powerful the billionaire class becomes. If everyone is rich, it is much harder to impose power and influence over the masses.

Watch what they do, not what they say.  They all pay lip service to "universal high income" and "abundance," while they are laying off tens of thousands of employees as profits soar. They scheme to pay as little in taxes as possible and support an administration that has enacted painfully deep cuts to the social safety net, literally taking food out of the mouths of children, decrying anything that would cost them higher taxes as communist.

Does anyone believe that at some point they are going to pivot toward sharing the wealth with those they have worked so hard to marginalize? Additionally, look at the way they are ravaging poor communities to build colossal, Manhattan-sized data centers in places like Mississippi (Musk), Georgia, and Louisiana (Zuckerberg), and West Virginia. Their lack of humanity is on full display. The places look like District 12 in The Hunger Games movies, and these billionaires couldn't care less. 

Anthropic co-founder Dario Amodei recently told 60 Minutes that he worries AI could replace half of all entry-level white-collar jobs and spike unemployment to as high as 20 percent in as little as one year. Are we having any policy conversations on how to prepare for what would be an economic apocalypse? "My worry is that it will be broad and it will be faster than what we have seen with previous technologies," said Amodei. Yeah, me too, but like most people, I don't have a billionaire bunker to retreat to when things go sideways and people are fighting for scraps like dogs in the street.

As it stands, AI looks more likely to be the next thing that makes a lot of people poor, while Uncle Sam steps in to protect the plight of the privileged if and when things go bust.  And because AI does not neatly fit into either side of the culture war, it has been difficult to exploit politically and much easier for politicians in both parties to ignore the dangers while continuing to accept mountains of campaign cash from its profiteers and then make big bucks working for the industry once they leave office.  AI has gone all gas, no brakes, and no one with the power to protect us is lifting a finger. If that terrifies you, you're not alone.

Dennis "Mitch" Maley is an editor and columnist for The Bradenton Times and the host of our weekly podcast. With over two decades of experience as a journalist, he has covered Manatee County government since 2010. He is a graduate of Shippensburg University and later served as a Captain in the U.S. Army. Click here for his bio. Mitch is also the author of three novels and a short story collection available here. He can be reached at editor@thebradentontimes.com.