Exporting the Crash
What happens in Silicon Valley will not stay in Silicon Valley.
With more and more mainstream voices asking questions about the viability of AI companies’ business models, as Anthropic’s IPO is nowhere in sight, I want to look beyond the bubble and ask broader questions about the American economy. As I argued in a previous post, the extremely high concentration of index value in Nvidia and the rest of the regular suspects in tech and AI, and with the broader American economy so financialised as to be completely devastated by a major market crash, there is real reason to worry about the fallout of the bubble bursting. The most important risk to consider is that the US will export chaos and recession if its financial markets throw a fit. AI might well change the world, just not in the ways Altman and Amodei thought.
Let’s start with the (relatively) good news. If the US economy crashes it will require a lot less energy, and being a highly gas and oil reliant economy it will lead to less pressure in fossil fuel markets. Doubly so (at least) when you factor in that the US has an enormous trade deficit with China, which is also an oil guzzling economy.
On the subject of trade deficits, as Trump has so often ranted about the US runs trade deficits with a lot of economies which means that if US retirees’ savings get cut in half in an AI crash, the reduced demand will get exported to the four corners of the earth. This will inevitably hurt China the most, as China has overcapacity even now that the American consumer is spending at a healthy pace. But it will also be tough for South Korea’s electronics industry, European luxury goods providers, carmakers everywhere, and less savoury exporters like South American drug cartels. When the US sneezes export economies everywhere will catch pneumonia.
It will also be tough for economies which have large portfolio investments in the US, Japan and the Arab Gulf comes to mind, as equity valuations will inevitably suffer from an AI crash. In the gulf the effects are likely to be contained, no new vanity projects like NEOM and no extensions to Ronaldo’s contract, but ordinary people will be left untouched. In Japan though, an aging society with a lot of current and soon to be retirees it could create a nasty recession.
My guess is that an AI crash will lead to a reorganisation of global trade as the current system based on the US dollar and with the US as the consumer of last resort will not survive an AI meltdown. There is also the question of high-end chip production after an AI crash. With the industry being organised so as to be able to satisfy the demands of the AI data centre buildout there is a question of who if anyone will be able to keep buying ultra high-end GPUs, and if TSMC can keep its foundries running without the hyperscalers’ demand given the fixed costs of running state of the art foundries.
In short, a lot will break if the AI story goes sour. If it comes, when it comes, keep second and third order effects in mind to stay ahead of everyone else. If the media is talking about Anthropic declaring bankruptcy, the real story is not in Silicon Valley, it is what that means for export economies in the rest of the world.
If you liked this post you can read a previous post about AI here or the rest of my writings here. I also have a section for longer reads I call essays here, I particularly recommend my series called The Bird & The Technoking exploring Elon Musk's takeover of Twitter, and its political and cultural implications. It'd mean a lot to me if you recommended the blog to a friend or coworker. Come back next Monday for a new post!
I've always been interested in politics, economics, and the interplay between. The blog is a place for me to explore different ideas and concepts relating to economics or politics, be that national or international. The goal for the blog is to make you think; to provide new perspectives.
Written by Karl Johansson
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