Bank for International Settlements warns AI investment race could turn debt-driven boom into bust
The Bank for International Settlements (BIS) says the current global investment race around artificial intelligence (AI) infrastructure is moving beyond previous technology boom cycles, which ultimately ended in severe market turmoil. A research report released on Tuesday by the Basel-based Bank for International Settlements warned that growing debt financing and financial linkages between hyperscale cloud service providers and artificial intelligence developers will raise the risk of broader financial instability if productivity growth ultimately fails to justify these huge investments. "The more capacity the industry builds, the higher the productivity threshold that must be crossed to sustain the boom," Bank for International Settlements economist Phurichai Rungcharoenkitkul wrote in the report. "So not only are larger booms more likely to disappoint, but if they do, the damage will be greater." Technology companies are investing heavily in artificial intelligence infrastructure in hopes of seizing future growth opportunities. These expansions were funded on the one hand through bond issuance and on the other hand through increasingly complex financing arrangements. In some cases, this financing structure has become "circular." For example, companies involved in cloud infrastructure construction hold equity in AI developers in exchange for the latter's commitment to long-term procurement of computing resources. For the Bank for International Settlements, known as the “global central bank club,” the current AI investment boom shares many characteristics of past technology bubbles. The report mentioned several historical cases: the canal-building craze in the United States in the 1830s; the British railway investment boom in the 1840s; and the Internet bubble in the late 1990s. These investment booms ultimately ended in sharp market corrections and broader economic shocks.