The scale of the capital expenditures is sui generis. There is nothing like it historically (in peacetime): the transcontinental railroad cost about $1 billion inflation-adjusted and the dot-com-era fiber buildout was probably about $500 billion. We’re obviously still in the midst but it’s estimated that the big players have spent over $1 trillion so far with $4–8 trillion from here. (WWII mobilization is estimated at $5 trillion.) Unlike past frenzies, this one’s largely equity-financed rather than debt-based. That speculation—equity’s junior to debt in obligations—has supplanted usual investment patterns and increased the cost of capital economy-wide (if it’s even available).

The specifics of this bubble are not philosophic in nature so they’re beyond the purview of this essay, but they have been ably covered elsewhere. Each of these analyzes the business side of “AI” with well-sourced, objective essays. (They’re variably rant-y but it’s “hard to keep your head while all about you are losing theirs” all the time.)

• Ed Zitron’s “Where’s Your Ed At?” in general but specifically:

  • Where are all the data centers?

  • AI is too expensive

  • AI’s Circular Psychosis or Am I Meant to be Impressed?

  • AI’s economics don’t make sense

• Will Lockett’s Newsletter

• Gary Marcus

One aspect of the bubble analysis that I haven’t seen discussed is why. Perhaps it’s because we’re in the midst of it and most causal analysis happens afterwards, but no one seems particularly interested in determining how we got to here.

The cause is President Joe Biden’s COVID-era monetary inflation. No doubt in my mind. It has just taken a while to play out and it came out in two spurts.

If you remember during COVID-19, the federal government—starting under Trump but accelerated by Biden—dispensed egregious amounts of taxpayer money while the Federal Reserve expanded its balance sheet prodigiously.

Ludwig von Mises’s theory of inflation-induced booms is that they hit producers first. In his reckoning:

The foregoing statements explain why an expansion in the production facilities and the production of the heavy industries, and in the production of durable producers’ goods, is the most conspicuous mark of the boom.1

The basic idea is that the government expands the money supply, which predominantly takes place as an extension of credit to the banks. These banks then use that money to invest or lend, primarily to the production side of the economy. This cheap, ready availability of credit is nominally a signal to producers that their neck of the economy is growing and it’s worthwhile to expand production to meet the expected demand increases.

When the demand doesn’t materialize (or doesn’t in time) then the producers go bankrupt, start merging, lay workers off, shed assets, and try to survive. This is the bust part of the cycle and there have been many in my lifetime. Until the bitter end, there are people saying “this is fine.” Afterwards, others start pointing: either to their Cassandra-like calls or their fingers at not-them that are responsible for the “events that are unfolding currently.” The average person just face-melts.2

To my mind, this unfolded the way it has because this usual bust-y path was delayed by COVID-era direct cash payments, loan forgiveness, eviction restrictions, and unemployment support. The banks, flush with cash in the form of reserves, sat out the producer-lending part while the consumers went bananas in the part of the economy that is usually a lagging indicator.

Thus the Biden-flation. It was in all the sectors that a growing economy supports—luxury goods, homes, gas, automobiles, groceries, restaurants—but blown up by an air compressor rather than the lungs of organic growth that won’t go too far. Each of those areas suffered stagnation or collapse with rampant layoffs to release the pressure.

Meanwhile, the banks mostly sat out this period because of its volatility and then thanks to the Federal Reserve’s unprecedented interest on reserve balances. Why lend to these consumer-facing sectors when you can earn a comfortable return doing nothing?

The “AI” bubble started once there became higher-return opportunities for the banks. Reserve balances started dropping but stayed at a level closer to the start of the pandemic thanks to the Fed’s incentive.

So where did the banks’ excess reserves come from and then disappear to? I think you know. This period coincides with the rise of private credit, private equity, and the dizzying valuations of the “tech sector,” especially NVIDIA and its customers.

It also coincides with the rise of the “tech sector” backlash, of which the data center Luddism is the latest fashion after “climate change” became déclassé. Its costume is the usual fearmongering but the wearer is the same collectivist as always.

The three styles that this current fashion takes are the following:

1. Stealing “our” water and electricity

2. Attack the data centers at the local level via permit litigation and public meeting activism

3. Wealth tax

Countering these three is beyond the scope of this essay since doing so takes factual arguments and political activism. There are a couple philosophic things to point out, though:

1. The data centers’ inputs are not “ours” to dole out or control. It is certainly true that the water and energy systems are currently under governmental—or quasi-governmental—control and apportionment is far more public than it should be. But they have every right to purchase those inputs at “market” rates as those who would restrict them. One captivating idea that’s arisen from this is the idea of “consumer-regulated electricity” and it’s, frankly, the most original reform I’ve come across in the sector:3

   1. Advocates for Consumer-Regulated Electricity (Twitter)

   2. Travis Fisher’s white paper

   3. Senator Tom Cotton’s DATA Act

2. Permitting reform and administrative state dismantling are sorely needed and seem to have finally found a smidgen of bipartisan consensus and some Supreme Court success while the activists have had some effects at the local level

3. The California wealth tax might be a union effort at browbeating Governor Gavin Newsom but that game of chicken might end with it on the November ballot. If enacted, it’s going to be the Bizarro Prop 13 and a thorn in the California right’s (such as it is) side for generations. It’s going to metastasize into something more like a “Success Tax” as the state’s hunger for funds becomes insatiable4

Ultimately, the right to property entails the right to incinerate capital as long as there’s no fraud involved. Though unfortunate, the “AI” bubble with its malinvested data center buildout isn’t up for public vote or governmental veto. The remedy for the other side of the transaction is bankruptcy: if the counterparties financed debt, then they’ll get whatever is salvageable of the stranded assets; if the counterparties took equity in exchange for capital, then they’re going to learn an expensive lesson. (Again, for many of the venture capitalists that have financed past tech bubbles.)