IMF Warns Of Debt-Fueled AI Spending As Bubble Fears Grow

(MENAFN- Asia Times) The International Monetary Fund warned Tuesday that the global economy faces serious risks from Big Tech firms taking on massive debt to fund the buildout of artificial intelligence data centers worldwide.

The IMF's latest Global Financial Stability Report outlines a number of risks to economic growth in the coming years, including a reliance on AI industry spending that it warns could lead to a new financial crisis.

The report points to the methods the world's largest data center operators, known as hyperscalers, are using to fund new construction as particularly troubling.

“Hyperscalers have strong earnings from their core businesses,” the report states.“Yet, free cash flows are rapidly declining as hyperscalers try to sustain large AI investment needs, leaving debt financing increasingly necessary.”

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The analysis also details the role played by so-called circular financing agreements, in which one company agrees to fund another company's AI project in exchange for the firm receiving the money buying the investing firm's products.

These arrangements could create dangerous interdependence within the industry that could spark a financial contagion if one of the firms goes belly up, according to the report.

“While investors... are generally financially sound, distress at key investee firms could present significant 'wrong-way risk' to the AI ecosystem,” the report states.“Equity and debt investments in the firms depreciate in value precisely when future revenue streams tied to them are impaired.”

Investment expert Bret Jensen, in an analysis published by Seeking Alpha on Tuesday, examined projected capital expenditures from the five biggest hyperscalers-Oracle, Microsoft, Facebook parent company Meta, Amazon, and Google parent company Alphabet-and highlighted how they have increasingly moved financing off their corporate balance sheets.

“Over the past 12-18 months, there has been a huge increase in debt and equity issuance,” Jensen explained.“The five hyperscalers now have a combined over $1.3 trillion of debt on their balance sheets and roughly US$3 trillion in off-balance-sheet allocations.”

Because of this, Jensen continued,“debt markets are starting to groan” by“signaling a substantial chance of default over the next half-decade on the debt of Oracle.”

Jensen also pointed out that half of this infrastructure was being built for the benefit of frontier AI labs OpenAI and Anthropic, which he described as“unprofitable” and“bleeding cash.”

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Dean Baker, co-founder of the Center for Economic and Policy Research argued in an analysis published on Friday that AI is completely propping up the US economy at the moment, as investors are holding out hope that it delivers an unprecedented boom in productivity.

The problem, Baker pointed out, is there is little sign that AI is going to deliver anywhere near the increased productivity needed to make these historic investments pay off.

“If we believe the hype, we are about to see an incredible surge in productivity that will make us ridiculously wealthy,” Baker explained.“To date, there is no evidence to support this view. Productivity growth has been at best on its trend pace the last couple of years.”

“If we don't see the massive gains in productivity promised by the AI enthusiasts,” Baker added,“then we will almost certainly see a collapse in the stock market, with a serious recession almost guaranteed.”

–Common Dreams

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