I have spent several days and a couple of niche news subscriptions trying to get my head around what is happening with AI financing. I’ve waded through articles bathed in econospeak about newly invented financial instruments, illustrated with complex graphs, many of them suspiciously triangular or convolutedly circular, with arrows showing money flowing around and through various companies, somehow generating value at each point along the way. All this financial creativity feels very 2008. I find myself wishing Margot Robbie would reprise her role as the champagne-sipping bubble-bath truth teller in The Big Short to lay it out straight for us. For as the narrator of that movie about the global financial crisis tells us, if financial instruments “make you feel bored and stupid”, then it is time to get worried. Because maybe that is the point.
This newspaper is littered with reports from reputable institutions warning of Ireland’s vulnerabilities should something go wrong with the tech industry. But what we hear much less about is a plan by those in charge for how we can start mitigating or preparing for these risks.
Warnings for Ireland about the possible economic fallout of an AI bubble bursting can be broadly grouped into three categories. The first is the impact of a simple market “correction”, or a significant drop in the value of tech stocks, which the Department of Finance last month estimated could result in a 3.25 per cent hit to our domestic economic activity. Tech stocks are both widely considered to be overvalued relative to their profits and make up a scarily high percentage of stock indices. Should they tumble, the department is telling us we will end up poorer as an economy, with less money in our pockets to spend.
The economic risks of a crash in tech stocks are global but a second cluster of threats are more concentrated here. The ESRI last year warned that the Irish economy faced larger vulnerabilities to the AI bubble bursting due to tech companies’ outsize importance in our economy. “This could affect their employment here,” they write, “and it could also affect the corporation tax receipts that come from these firms.”
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This week the Irish Fiscal Advisory Council (Ifac) reminded us yet again of the extent of our reliance on foreign direct investment (FDI), with tech firms making up two of the top three companies dominating tax revenues. Ifac’s annual warnings have become so regular that they risk fading to background noise, but this year it included a stark statement on just how concentrated our reliance has become. While we used to rely on a few sectors, and then on a few firms, they tell us, our financial fate now rests on “a few highly profitable products and services”.
The third risk is more emergent, more global and more worrying. It is the way the AI industry is becoming entangled in the global financial system by acquiring staggering quantities of debt. Morgan Stanley forecasts that $570 billion is being borrowed this year to build AI infrastructure. Chip manufacturer Nvidia has faced criticism for lending money to its customers to buy its own products, so it has now built complex “partnerships” with six big Wall Street lenders, including BlackRock and Goldman Sachs, to extend hundreds of billions of dollars of further credit. Nvidia’s chief executive has gone so far as to declare his chips a whole new asset class, like real estate or government bonds, against which credit could be secured. The Financial Times declared this a bet by Wall Street that Nvidia could “defy the laws of finance”.
Our Department of Finance acknowledged this in last month’s report, noting that “the AI boom’s growing reliance on debt” could “amplify the impact” of a downturn. But the Bank for International Settlements, the advisory body to the world’s central banks, goes further. It warned in June that current “AI exuberance” could lead to an “investment bust”. The 96-year-old institution said the AI bubble had “parallels” with previous financial crashes that followed the expansion of canals and railways, and the dotcom bubble. “These episodes,” they warn, ended with “economywide recessions.” And high levels of debt could make this worse, so that now “financial stability could also be at risk in the event of an AI bust”.
These expert warnings are stark and for the most part not clouded in the jargon of complex financial instruments. Yet in many of these reports I detect the resigned tone of a future “I told you so”, rather than the hopeful tenor of a policy prescription the authors believe politicians will actually act on. They give little indication that policymakers have a plan for what to do if a bust actually happens.
[ AI companies are starting to sound desperate, and that’s not a good lookOpens in new window ]
Right now it feels like every warning light on the economic dashboard is flashing, most recently the volatility in tech stock prices. An old joke goes that the stock market has predicted nine of the last five recessions, so swings in valuations are not reliable evidence that an AI crash is imminent. But even if we estimate that the chance of the AI bubble bursting is 20 per cent or 5 per cent or 1 per cent, the compounded effects on our jobs, domestic spending, tax revenues and our exposure to a damaged global financial system, mean that we need to be really, really prepared.
Ireland has weathered a lot of economic storms. We are rightly proud of the preparation our public servants did for Brexit, in stark contrast to David Cameron’s ruinous hubris. And experts like Ifac have laid out what we have to do. Make a realistic national budget and then stick to it. Work out how we genuinely diversify our economy away from risky FDI dependency. And stockpile cash like our healthcare system, our sovereignty, and our kids’ futures depend on it. Because they might. Maybe Margot Robbie will never have to explain to us how AI “circular financing” led to calamity, but if she does, I’d like to watch that movie knowing that at least we had done all we could to prepare.
