An ex-White House economic advisor says the current AI bubble is flashing signs of excess and could trigger a massive loss of household wealth if it bursts.
In a new CNBC interview, Jared Bernstein, who chaired the Council of Economic Advisers under President Biden, warns that AI valuations have climbed beyond even the speculative excesses of the late-1990s dot-com era.
He highlights that the AI industry now accounts for a sizeable chunk of the US economy.
“The problem with bubbles is it’s hard to know if they’re really what you think they are until it’s too late. But there are a number of characteristics, rapidly rising asset prices, which we sure have in AI, really some very extreme valuations…
We point out that the share of the economy devoted to AI investment is nearly a third greater than the share of the economy devoted to Internet-related investments back during the dotcom bubble. So we think there are enough analogies there to make the call.”
His biggest concern, however, is not the companies themselves but the investors rushing in in hopes of catching the AI train.
“The thing we’re concerned about is not so much that these companies, especially Nvidia, can’t defend their investments; it’s the extent to which regular mom-and-pop investors are getting into this bubble in a way that, should it pop, if it pops, we could have a really large negative wealth effect. We’re talking hundreds of billions of dollars. This is the idea that you gain a dollar in stock market wealth, you spend an extra 3 cents. That’s the wealth effect.”
Bernstein says a bursting AI bubble could deal a far bigger blow to consumer confidence than the dot-com crash.
“So what really took down the economy in the dot-com bubble was, in part, a wealth effect, which was actually quite small. Any GDP contraction there was minimal. This is a lot bigger. We’re worried about the extent of investment relative to where we were back then and the extent to which, should it pop, it will hurt consumer spending, which kind of feeds into some already underlying fragilities in the real economy.”
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