A new report to be presented today at the Brookings Institution shows that the total cost of the AI build-out through 2032 will be $10.3 trillion. That amounts to 3.63 percent of GDP per year, many times that of previous large-scale infrastructure investments, from the 19th-century canals, the railroads, telephone, and electric grids, to the interstate highway system.
And unlike AI, whose benefits are speculative, unproven, and with hard-to-fathom risks, these earlier investments in infrastructure more than paid for themselves in productivity gains to the broader economy. The Brookings report also raises the alarm that much of the funding for the AI build-out is financed by debt, some of it unknown because it is hidden in off-balance-sheet financing. That immense AI debt also crowds out more productive borrowing, and raises interest rates.
Some of this debt will never be repaid. And a great deal of both the stock market boom and the surprising continued GDP and job growth rests on the artificial and unsustainable stimulus of the AI bubble.
Combined with citizen pushback against giant data centers, the concern of some AI executives that they have overreached and need an excuse to pause, and the rising interest rates due to Fed policies and bond market panic, the stage is set for a financial collapse comparable in scale to 2008 or 1929.
On Thursday, right on cue, it was revealed that Oracle, which is behind on its plans to develop a massive AI data center in New Mexico, sent a notice to the center’s property developer, Blue Owl Capital, that it would be unable to meet its payments on time. Oracle is $18 billion in debt on the deal. Astonishingly, Oracle cited “force majeure,” a boilerplate provision in contracts excusing failure to perform usually reserved for wars and weather disasters.
The force majeure in this case is delay of needed regulatory permits, and citizen protests—not a war that Oracle wanted to fight. I’ve researched the success of force majeure claims in similar cases, and courts have taken a dim view of them when push comes to shove and the creditor litigates. There were several such claims during COVID, and courts tossed them out by demonstrating that despite the pandemic, the debtor had plenty of money to pay up.
Though both Oracle and Blue Capital sent out press releases putting a pretty face on Oracle’s efforts to stiff its creditor, the stock of both companies fell sharply yesterday. Oracle, whose CEO Larry Ellison assisted his son David with $40 billion in personal guarantees to build the Paramount empire, is sorely stressed on all fronts. Its stock is down 50 percent in the past year. Oracle’s long-term debt stood at over $117 billion, representing a 43 percent year-over-year increase. S&P has downgraded its credit rating to one notch above junk bond status, and Oracle will have to come up with billions more to satisfy the terms of its recent sweetheart settlement of its antitrust suit.
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It remains to be seen whether Oracle’s force majeure ploy marks a Bear Stearns moment signaling that the party is over, or whether investors will keep whistling past the graveyard a little longer. At this writing, the broad stock market is up about half a percentage point. As Citigroup CEO Chuck Prince infamously told the Financial Times defending his speculative trades just before the market collapsed, “As long as the music is playing, you’ve got to get up and dance.”
Thus the genius of efficient unregulated private markets. We’ll see how long this danse macabre will continue.
A deeper dive into the dependence of the massive AI build-out on unsustainable debt is even more troubling. A recent report by Goldman Sachs research found between 33 and 37 percent of all capital expenditures by AI hyperscalers is debt finance, and that doesn’t count off-balance-sheet debt.
There is now a kind of weird marriage of convenience between citizens blocking data centers, AI executives who want an excuse for a pause in delusional expansion plans, and advocates of some kind of regulation against the risk of rogue AI breakouts creating catastrophes. President Trump, by pushing hard for untrammeled AI expansion, is at odds with more and more vulnerable Republican House and Senate candidates, and much of the MAGA base. The AI bros, meanwhile, are promoting a cartel of soft self-regulation.
In terms of an AI-led economic collapse, it doesn’t much matter how the regulatory debate turns out, though that is a valid question in its own right, for the next Congress. For now, the almost certain pullback in the inflated AI expansion plans will show that much of the AI debt is unpayable. And that will have dire knock-on effects for the entire financial sector.
As Warren Buffett once said, “You never know who is swimming naked until the tide goes out.” Once more, we are about to find out.
