WAIT, THE AI BUBBLE POPPING WILL BE GOOD FOR THE CORPORATIONS?

THE STOCKS DROP, BUT THATS ALL GOOD; GRAPHIC BY ELLIOTT CISCO

The AI “bubble” is soon to pop. When investors pull out and the economy crashes, the recession that ensues will wreak havoc among families and businesses alike. This foolish short term cash grab might actually benefit the corporations that caused it, though. Read why this may be so and about economic bubbles.

Blowing Bubbles in the Economy

  So, what even is a “bubble”? According to Oxford Languages’ English Dictionary, a bubble is a “a good or fortunate situation that is isolated from reality or unlikely to last”. 

That is pretty much what an economic bubble really is; investors who are unaware of issues with their investment (or are only there for the cash grab) invest tons of money into not long-term financially secure companies. When the companies are unable to inflate their stock price any more and they run out of money to burn, investors realize what’s going on and pull out, causing a huge economic crash. The size of the crash is usually dependent on how much money is invested. According to Stanford University almost 1.3 trillion dollars was invested into AI in just 2020-2024, one crash could be very harmful.

You may be thinking, “how could just 1.3 trillion dollars, or ~1% of the yearly global GDP (Gross Domestic Product), affect the economy so much?” Well, it’s a bit like a snowball effect. When a bubble “pops”, it’s because somebody sold a significant amount of stock or investment that makes the value of the stock go down enough to scare everybody else into selling. 

Whether this first person sold the stock just because they wanted the money or because they got uncomfortable about holding the stock doesn’t really matter. What matters is that once selling leads to the stock going down enough to make more people sell (and thus decrease the value of the stock further), a snowball effect is started. Usually, this leads to the stock hitting rock bottom, and people stop buying it completely in fear of more loss. 

This is where the size of a bubble matters. The bigger the bubble, the more stock value is able to fall before hitting rock bottom. At that point, most people have already sold their stock and it cannot go down any further. And what does falling stock value do? It slightly worsens the rest of the economy. 

This is how bubbles can affect everything, sending devastating ripples through the economy. When the rest of the economy gets worse, other stock values are no longer supported by that previous, stronger economy, and risk falling in value. This, of course, scares people in other areas to sell their stock, creating more snowballs.

  These first crash their own stock before then worsening the economy and making it more likely that others sell their stock and start even more snowballs.

 When all the stocks eventually fall, nobody buys stock despite its cheap value. This is because the economy is so bad, that any investment could just lose value instantly. This gets the economy stuck in a sort of hole. Nobody will buy stocks because the economy is bad, but the economy is bad because the stocks are down.

This is why a huge 1.3 trillion dollar bubble popping could be very bad. The bigger the starting bubble, the more the stock is able to fall and therefore the worse the economy is able to get from just the one unstable stock alone. Like a starting push, a big bubble has a very high chance of causing the entire economy to crash. By going over some blurry threshold of worsening the economy from one stock, somebody who holds a stock in another area gets scared enough of their stock going down to sell it; this starts the snowballing.

What Makes AI Stock so Volatile Anyways?

Trying to understand the economy and stocks is kinda weird, because it’s mostly a mind game. Whether a stock tanks or when likely can be entirely dependent on one big investor who suddenly decides to sell a ton of their stock. Whether somebody who sees that stock going down gets scared of the economy worsening enough to decide to sell theirs is dependent on what they think. Maybe they actually knew that that one stock was going to crash, and were ready to sell their other stock as soon as they saw that one go down.

 This is why it can be very hard to predict what will happen. Will people who hold stocks in areas unrelated to the bubble decide to sell when they see it pop? Or maybe when they see that it popping made the economy worsen enough to lower their stock? Will they sell if they see one person sell, worried about the loss of their stock caused by further selling? 

 While all those questions may be very hard to answer, if one thing’s for certain: the AI bubble popping will be big enough to result in these chain reactions. According to MarketWatch, the AI bubble is 17 times larger than the dot com bubble. If that was enough to snowball, the AI bubble certainly is.

Enough with the doomism, though; what makes the AI stock(s) a “bubble”, anyways? Well, AI is a bubble because tons of investments are going into things that will never profit or won’t profit much. In other words, these AI companies are burning cash to stay alive, and don’t have anything to show for it. When investors realize that their stock value is only being supported by other investors pouring more money in, and that it will never grow itself, somebody will pull out (sell). That will start the chain reaction, and so on.

According to Harvard Business Review, AI companies have a very high variable cost and a relatively low profit. This makes sense; training and building AI models requires tons and tons of high level computer chips (which lose their value after a few months) and lots of electricity. Not only that, but just running the models after you train them costs a lot too. Most people aren’t very interested in using these AI models, and those that do use them do so for free or pay a low subscription fee. The less people that use the AI, the less it was worth it to invest in training and building the model in the first place.

According to ABC news, a MIT study found that 95% of AI companies fail to generate any revenue. So, yes, AI is very likely a bubble. Some investor will see through the fog of hype generated by these companies and realize that they will likely never get any true return, before then selling their stock and starting the chain reaction of doom. 

Failing Upwards

How could a huge stock crash possibility benefit these AI companies? After all, this huge bubble was created and fueled by greedy CEOs in a very short term decision, so it would be quite fitting if it all fell back down on them. Now, for the rich CEOs, a huge economic crash will barely affect them. They’re so rich they really don’t have to think about the prices of food or other necessities. But for the companies? It’s a bit of a different story.

Of course, any stock crash would be quite bad for any business. For these AI companies, their stock value will crash and investments will likely stop for a bit. They might be able to sell some infrastructure to try and stay alive, but computer chips lose value very quickly due to how new, better ones come out fast. Their name might also be harmed a bit, but that’s nothing a little rebranding can’t fix. 

In order to survive an event like this, these companies will need to find a way to make 

their product profitable. This will be very difficult, almost impossible even. But this may be their saving grace. You see, if survival is very difficult, most AI companies may die out. A problem with AI companies' profit that was highlighted by Harvard Business Review earlier was that AI has a very low entry bar. 

For example, a while ago DeepSeek entered the scene and with far fewer resources got a ChatGPT-level model right away. It’s very hard to cement your place as a company if new competition can enter at any time and suddenly beat or match your best. 

If an economic crash occurs, it might kill these smaller companies and reduce competition, thus allowing surviving companies a small time where they can cement their place as the big ones and start to monopolize the AI place. This will make those AI models they invested in building more worth as users flock to just a few companies (in opposition of many different companies). This makes the AI bubble popping potentially really good for them, as it could fix their broken business model and make them profitable for once.

Summary and Opinion

Despite this, it is still questionable whether the AI bubble popping would result in a good outcome for AI companies. Economic crashes can sometimes just be really bad, and that may end up being the case for these companies. And who knows- maybe AI companies will suddenly become hyper-profitable and the bubble will never pop.

 If anything, I find it hard to see a good outcome in this situation (for the general populace). Either the bubble pops and there would be a huge economic crash (not good for obvious reasons), the bubble doesn’t pop and AI companies become super rich (we love data collection, personalized store prices, and other predatory things enabled by this technology), or an AI becomes super powerful and becomes the overlord of Earth, or whatever (uh-oh). 

The things AI brought that were genuinely useful are not, in my opinion, worth the cost that it brought in the form of filling the internet full of easily mass producible misinformation, making education significantly more difficult for schools, and many other things.

Either way, this is the direction that the corporations led us, so clearly it is the right way. So, the next time you get into an unwanted situation with an investor, just whisper “AI” in their ears a few times and they will suddenly become hypnotized and will follow your any command. Trust me, this totally works.