How is this different from check kiting?
intercst
2 Likes
All economies are circular. You make some money and spend it, so does everyone else. That’s why it’s called money in circulation!
Most people don’t yet have much use for AI so the AI Circulation Universe is still quite small. It happens with every new technology to some point or other.
The Captain
1 Like
In another parallel, don’t the auto companies such as Ford and GM offer financing to people so they can buy cars?
DB2
3 Likes
@intercst I posted about this earlier this week. The real concern is that the internal AI ecosystem spending is orders of magnitude greater than the end-user buying of the service.
The “check kiting,” as you call it, generates a huge amount of GDP growth and most of the growth in the S&P500. A lot of the money comes from profitable corporate giants that can finance out of current cash flow (Amazon, Google, Microsoft) but many are borrowing. Morgan Stanley estimates a $1.5 trillion “financing gap” in capital expenditures for AI hardware and data centers between 2025 and 2028 that will need to be met by external capital, with $800 billion expected to come from private credit (a form of debt).
I am very concerned about this. It reminds me of the debt-financed infrastructure build-out before the dot-com crash.
The dot-com crash caused a stock market crash but not a financial crisis.
An AI bubble bursting would certainly pop the S&P500. Is the scale of borrowed money enough to also cause a financial crisis? Probably not, but the numbers are large and nobody knows who is naked until the tide goes out.
Wendy
1 Like
AI focused high grade debt is $1.2 trillion as of Oct 2025. The total debt market is $338 Trillion.
Like Bitcoin, this is lost in the roundoff.
intercst
@intercst what fraction of outstanding debt did Lehman Brothers hold when its bankruptcy triggered the 2008 Great Financial Crisis?
The question is not the percentage of total debt but whether the failure pulls on an unravelling interconnected web of debt like pulling yarn out of a knitted sweater. That’s why AI’s circular financing model is potentially so risky.
The Federal Reserve recognizes the dynamic of snowballing instability. That’s why they bailed out Silicon Valley Bank’s non-insured customers in 2023. The peak of this bail-out can be seen as the Fed printed fiat money to do it.
Wendy
3 Likes
Yep! That’s how GE and others almost went broke in 2007-08.
A sale is not a sale until the check is in the bank and it does not bounce.
The Captain