The Bank for International Settlements (BIS), known as the central bank of central banks, has warned that excessive optimism about artificial intelligence (AI) could lead to a prolonged investment slump, shaking financial markets and damaging the global economy.
According to the Financial Times (FT) on Sunday, the Switzerland-based BIS said in an annual economic report released that day that tech companies could issue return forecasts below market expectations, which could cause funding problems and ultimately lead to a prolonged investment slump.
In other words, U.S. hyperscalers — major cloud operators such as Amazon, Alphabet, Microsoft (MS), Meta, and Oracle — could at some point present return forecasts below market expectations, and these companies could face funding difficulties, eventually scaling back investment and adversely affecting financial markets.
The report acknowledged that "optimism about AI has so far been an important driver of global economic growth" and that "AI could significantly boost productivity over the next decade."
But the report cited the canal expansion of the 1830s, British railway construction in the 1840s, and the dotcom bubble of the late 1990s, assessing that these cases offer useful lessons for the present. While the canal expansion and railway connections that revolutionized logistics networks, as well as the dotcom bubble that opened the internet era, were all major technological innovations, they attracted excessive capital and produced aftershocks.
In fact, during the canal construction period of the 1830s, related capital investment in the U.S. increased 4.1-fold over five years. During the railway construction period of the 1840s, which began with the advent of the steam locomotive, investment rose 2.7-fold over four years. Related investment during the U.S. boom of the 1920s, driven by the mass production system, and during the dotcom boom triggered by the emergence of the internet in the late 1990s, each grew 1.9-fold over five years. All of these are viewed as investment frenzies from today's perspective, but they are far smaller in scale than the current AI rush, which has invested "4.5-fold over three years" and signaled even more investment to come.
The BIS analyzed that "these past events eventually led to declines in investment, causing overall economic recessions." This is why the BIS warns that the AI industry, which has climbed to an even higher point, could bring a downturn with a steeper drop.
The BIS expressed particular concern that a large-scale stock market correction related to AI could have a broader impact now than in the past. It noted that households are investing more in stocks relative to their assets and income. The BIS also diagnosed that financial stability could be threatened, as AI companies are issuing massive debt to fund their investments.
