Maia Mindel, at Some Unpleasant Arithmetic (on Substack, regrettably), writes a discursive, 11,000-word primer on AI, asset bubbles, and the anticipated economic impact of the artificial intelligence industry. It’s copiously linked and genuinely helpful, complete with comparisons to the dot-com implosion, the financial crisis of 2007, and the housing market crash of 2008 (oh, joy). It’s very much worth the read and I could quote it at length; here are three:

The fundamental question for AI is the same fundamental question the dot coms faced: is the business model there? Given that […] the business model is heavily betting on AI revolutionizing the economy in the short term, the stakes are high on all ends. If the AI bet pays off, the labor market implodes. If the AI bet doesn't, the capital market does.

I’m hoping for a third option.

On infrastructure:

Thus, the question is infrastructure: are AI companies overbuilding relative to a reasonable level of demand? That's the central question. If the companies are reasonably estimating demand, then they will recoup their investment on data centers and other physical assets. If they're not, then it's a bubble and we'll all go to shit.

Mindel’s conclusion:

So the question about AI isn't whether there's an irrational mania; it's whether the market is pricing an endeavor that involves spending mid single digit trillions of dollars to produce low double digit billions in revenue. […] The amounts of debt required to finance all this investment are also astronomical, and are increasingly complex, featuring a number of byzantine instruments and byzantine financial arrangements that are driving comparisons to the financial crisis of 2007, which is how you know that everything is going well.

[…]

The problem […] is that eventually the fake reality of finance has to give way to the real reality of fundamentals. The housing bubble was driven by supply-side constraints preventing effective housing demand from being met, a rapid expansion of debt and credit without sufficient oversight, and extremely complex and opaque instruments proliferating. Unless the AI bubble generates cash flows, it will suffer the same destiny. But, after the housing bubble, people still live in homes. After the AI bubble, people will still use AI.

I’m hoping the coming burst of the AI bubble is the result of a technological breakthrough that massively reduces the compute and energy needs, making infrastructure cheap and driving costs through the floor. I’ve lived this before, with internet connectivity: from dial-up to DSL to cable to fiber. I recall craving expensive ISDN or T1 lines, which were vastly more expensive than—and a tiny fraction of the speed of—your average cable internet and fiber connections today. Internet access is faster, cheaper, and more ubiquitous than it was before the dot-com implosion. After this seemingly inevitable crash, I expect AI will be, too.

(Via Faisal N Jawdat.)