Investing.com --The scale of the artificial intelligence investment boom is becoming a source of concern, with spending on infrastructure potentially exceeding $10 trillion if companies follow through on their current plans.
Bill Dudley, former president of the Federal Reserve Bank of New York, warned in a Bloomberg Opinion article that the race to build AI capacity risks creating an industry with far more infrastructure than it can ultimately support.
At least seven or eight companies are pursuing ambitions to become major AI hyperscalers, but Dudley believes only two or three may emerge as dominant players. The economics of cloud computing, where scale and network effects favor a handful of large providers, could play out similarly in AI.
That raises questions about whether the industry can generate enough revenue to justify the enormous capital commitments. Given the rapid depreciation of data centers and computing equipment, Dudley estimates that AI infrastructure could require more than $3 trillion in annual revenue to deliver an adequate return on investment.
The potential fallout goes beyond technology stocks. A reversal in spending could hit equity markets hard, while also exposing lenders and investors that have financed the infrastructure buildout.
Dudley does not see a repeat of the 2008 financial crisis as the most likely outcome. Unlike the mortgage market ahead of the global financial crisis, risks surrounding AI investment are already widely discussed. Financing also tends to be longer-term, making a sudden wave of forced asset sales less likely.
Still, there are reasons for caution. Much of the funding comes from private credit and leasing arrangements, making it difficult to establish exactly who is exposed and under what conditions. Some obligations also remain off balance sheet until data center projects are completed.
Nvidia's guarantees of future chip values present another potential vulnerability. If those guarantees are triggered as chip prices fall, the company could face additional financial pressure precisely when its margins are already coming under strain.
Dudley is calling for regulators to improve disclosure of financing arrangements and contingent liabilities, arguing that investors need a clearer picture of the risks building beneath the AI spending boom.
The investment cycle may not end in another financial crisis, but the amount of capital involved makes the consequences of a sharp correction difficult to dismiss.
Original Article
AI spending boom could exceed $10 trillion, raising fears of financial fallout
Netanyahu urged U.S. to resume Iran strikes after midterms, AP says
Apple, Palantir report; U.S. midterm elections ahead - what's moving markets
