A surge in investment and debt in the AI data center industry is raising concerns about a potential financial crisis. Despite promising advancements in AI technology, the sector’s rapid growth is largely driven by computing power needs, which could lead to an unsustainable boom.
Several tech giants, including Apple, Google, Meta, Microsoft, and Amazon, are pouring billions into building new data centers, with capital expenditures exceeding $102.5 billion in the latest quarter. This spending is significantly higher than previous decades’ investments in telecommunications infrastructure.
Experts warn that if the AI industry revenue doesn’t grow at a fast pace to match the capex boom, it could lead to a crash and affect Big Tech shareholders’ fortunes. Moreover, some private credit funds are financing this growth, which poses risks to banks and other lenders.
The private credit market has grown rapidly in recent years, with bank loans fueling its expansion. If the default probability of these loans is highly correlated, a bust in the AI industry could lead to widespread defaults among private credit funds, causing systemic risk to the banking system.
Insurance companies, which invest in private credit funds, are also at risk due to their exposure to below-investment-grade debt. A potential financial crisis could have far-reaching consequences, including affecting the power grid’s ability to handle new demands from data centers.
While some experts argue that a boom can be beneficial for future technological advances and business models, others caution against ignoring the risks of an unsustainable investment bubble. As Jamie Dimon, CEO of JP Morgan Chase, warns, “As long as the music is playing, you’ve got to get up and dance.”
Source: https://www.noahpinion.blog/p/will-data-centers-crash-the-economy