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Where is all the AI money coming from?

So far, we've seen about US$2.2 trillion invested in AI.

You have to wonder where all this money has come from, don't you?

I'm not a financial genius but it strikes me that a great deal of this $2.2 trillion must be imaginary money because I don't think any government would print that much new coin, for fear of the inflationary effects.

Now some of this has come from the enormous cash reserves held by big-tech companies such as Microsoft, Google, Apple, Meta and the like but a lot of it really does seem to have been "magic'd" out of nowhere.

And the truth is that this is exactly what's happened. Around $1.2 trillion of that AI money simply does not exist.

You see it's not only governments that can print money, private enterprise can do it to.

Simply by extending credit, by allowing a customer to incur a debt, money is magically created in the economy.

This type of money-magic is beyond the control of governments which means it can produce some very distorting economic effects, as I'm sure we'll see in a little while when some of this enormous debt is up for payment.

You see, so long as payment isn't demanded, everyone gets richer by way of this "magic" money.

In the case of AI, we have companies that have bought huge numbers of GPUs on tick with NVIDIA. They are rich because they have these valuable assets. NVIDIA is rich because they have a debtors' ledger that is brim full with clients who owe them massive amounts of money.

So long as NVIDIA doesn't demand cash payment then everyone's happy.

To avoid things getting too far out of whack, NVIDIA has even started giving its customers chunks of cash to pay for the GPUs they've bought. It does this by way of investing in those customers and effectively swapping debt for equity. This avoids too many questions about the company's debt exposure because shares are something you can declare as an asset.

With a new AI datacentre costing up to US$16 billion it's pretty clear that a great many of these projects are also built on debt. That's "magic money" to you and me.

Of course all this debt has to be paid eventually and it's the users of AI services that will be the ultimate source of those funds.

That still leaves me wondering, where will all those trillions of dollars come from?

You and I can't conjure up money out of nowhere but we're the ultimate consumer of all the services that have been funded by debt. If trillions are going to go into the purchase of AI services then those trillions will not be going somewhere else so won't that wreck parts of our existing economy?

What about the wealth migration this will obviously cause?

If it's you and I who are ultimately footing the bill for all this investment the money is coming out of our pockets and ends up in the pockets of the AI companies and those who have invested in them.

Isn't that just more of the same old "the rich get richer and the poor get poorer"?

I'm really not sure where this is headed but I can't see that it's a good place.

For the "average" person it has to be fewer jobs and less money.

The real worry is that if/when this all falls apart, the impact will be far greater than the 2008 global financial crisis and greater even than the dot-com crash. That's because the dot-com boom was driven by venture capital (real money) whereas the AI boom is being driven by debt.

Remember October 19th 1987? That was also a partly debt-driven crash and it was not fun.

A bursting AI bubble would not be so instantly dramatic but the fall-out would be even more impactful and damaging to the world's economy than the events of 1987.

Maybe some super-clever financial guru will explain it to me. If they do, I'll pass it on but in the meantime, I'm not so sure that the decades ahead will be quite as much fun as we've been promised by the likes of Elon Musk. He's told us all that we don't have to worry about working because it will be unncessary once his AI and robots are fully rolled out.

Yeah, nah!

Carpe Diem folks!

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