Central banks warn AI bubble could trigger global recession as Big Tech spending hits $1 trillion

How the AI bubble could pop and take down the global economy, according to the BIS

Central bank for central banks sees shades of dotcom mania in hyperscaler capex binge The central bank for central banks is concerned about the eye-watering sums being invested into AI, and it's raising the specter of a global recession should the bubble burst. In its annual report for 2026, the Bank for International Settlements compared the current craze to historical events, including canal and British railway mania in the 1800s, electrification exuberance of the 1920s, and the dotcom boom of the 1990s. The report states: "all shared one common trait: a genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify. "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions. The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term." The Register has already reported that Amazon forecasts capital expenditures of $200 billion for 2026, Microsoft is projecting $190 billion, Google some $180 billon and Meta up to $140 billion. Oracle is also betting big on AI. BIS estimates the five largest hyperscalers are set to spend more than a trillion dollars on AI-related capex in 2026 - and given the inflationary conditions regarding memory and that each rival is trying to outdo each other, that seems plausible. "These commitments are outpacing earnings and the free cash flow of these firms, leading some to issue debt to raise additional financing. This investment race may be partly driven by the perception that only a small number of players with superior technology will ultimately dominate the market shares." Intense competition is leading to the risk of the tech giants overcommitting resources to "investment projects with still uncertain returns, leaving all firms vulnerable to disappointments in AI payoffs." This is because as competitive pressure drives spending ever higher, the net economic surplus for the tech industry declines and "could turn negative in adverse scenarios." "Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust with potential knock-on effects on the financial conditions," the annual report continues. The report also cited concerns about a looming "supply side roadblock" around issues like electricity availability, chip shortages and grid connection bottlenecks. AI datacenters are already putting pressure on energy prices and input costs with "potential spillovers to inflation." "Looking ahead, these temporary shortages may also amplify over-investment, as firms attempt to lock in future capacity through long-dated contracts that further expose them to any disappointments in demand." Should inflation spike or AI-led investment collapse, the macroeconomic consequences could be amplified by "existing financial vulnerabilities." Policy rates being tightened to get a hold on inflation may precipitate a "sharp pullback in asset prices after a prolonged period of exuberant risk-taking, triggering disruptive macro-financial feedback loops." Given AI companies' "rising leverage" and a "growing footprint in credit markets", a major change in optimistic sentiments towards these businesses could have serious financial knock-on effects. "Vulnerabilities extend to their supplier ecosystem, including engineering, procurement and construction contractors whose balance sheets are comparatively weak, leaving them exposed to any Capex pullback by hyperscalers." The "opacity" of AI-sector financing is compounding vulnerabilities as corporations create a web of private arrangements - circular financing - and the terms of datacenter facility leases are often not fully disclosed, BIS adds. The backdrop to all of this is that, while enterprises running pilots report some efficiency gains at a employee level, few report discernible productivity gains from AI projects that went into production environments at scale. The Register has long discussed concerns about the dynamics of the AI industry, as outlined in the many links in this article above. It now seems that suits in the finance industry are waking up to the potential pitfalls too. ®

AI hopes and fears dominate global central bank meet

SINTRA, Portugal, July 1 (Reuters) - Seeping into just about every conversation at this week's meeting of the world's top central bankers was one big unknown: how artificial intelligence will impact the world economy and therefore their mandate to ensure financial stability. The consensus of those discussions at the ECB's annual conference in the windy hills of Portugal was that AI has the power to disrupt everything and create problems they can't even imagine right now: in financial and labour markets, in bank lending, for security, and even for power demand. "If AI overdelivers, it will impact financial stability. If AI underdelivers, it will impact financial stability," Torsten Slok at Apollo Global Management told the arbiters of interest rates around the world at one of the main panel sessions in the resort of Sintra. AI was such an overarching theme in Sintra that the topic found its way into every discussion, from immigration and supervision to climate. It even outdid new Federal Reserve Chairman Kevin Warsh, making his debut meeting with fellow central bankers, as the clear star of the three-day show. While AI can improve every corner of life, the fear of many speakers was that it can also disrupt it, at times ⁠illegally, and that finance officials have few if any tools to stop it. "This is the biggest time of consequence to each of our economies, I think, in our lifetime," Warsh said about the AI revolution. "Who knew when the internet was born that the internet was going to create a million and a half jobs as Uber drivers? We are in the first to second inning of this revolution," he told the ECB Forum. INFLATING BUBBLES In the case of trading, automation is already running most functions. But an AI-driven boost could inflate bubbles at warp speed, then crash them, profiting both on the way up and on the way down in a type of collusion that is now illegal. "Something that is even more advanced and potentially more disturbing, is the ability of these algorithms to coordinate on a manipulative path of prices," University of Pennsylvania professor Itay Goldstein said. "These algorithms indeed manage to achieve this kind of manipulation, creating bubbles leading to crashes, and this, I think, has more significant implications for financial stability," he added. One potential bubble AI is already creating is that of AI stocks, in part generated by massive capital spending on the building blocks of AI, which Slok estimated had added one percentage point to U.S. GDP alone. While valuations have retreated in recent ⁠weeks, experts liken the rapid rise in pricing to some of the biggest asset price busts in history, like the British railway mania of the 1840s, the roaring 1920s or the dotcom boom. "The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term," the Bank for International Settlements said in a report. SUPERVISING THE UNEXPLAINABLE AI will also help -- but complicate -- lending. Banks will be able to do more sophisticated credit analysis and extend funding to borrowers now outside their traditional sphere. But supervising this will be a nightmare. "How do supervisors assess those kind of agentic loan decisions? They are a little ⁠bit black box. There's potentially a lack of explainability, and I think that is a key supervisory challenge," Tobias Adrian, a senior IMF official, said. AI will also drive a wedge between richer and poorer firms and countries. Defending against malicious threats will become even more expensive, and otherwise viable firms will struggle to protect themselves. "When you think of the most outrageous attacks, they're often attacking the weakest link," Adrian said. Sarah Breeden, a Bank of England Deputy Governor, said a ⁠potential solution may be to create some sort of insurance scheme, likening it to deposit insurance in case of bank failures. "In a cyber context, do we need systems that allow one institution to pick up another's basic functions during disruption?" she said. But the ultimate risk is that the excessive success of AI could fundamentally undermine the global economy. If AI delivers on some of the most optimistic efficiency expectations, machines could replace ⁠humans en masse, leading to large unemployment. This then reduces disposable incomes and pushes the economy into recession, undermining the case for the investment. But if AI is less successful, then the massive investment into the sector fails to deliver the expected returns. "The internet proved to be better than anybody imagined, created whole new businesses, but we still got the dotcom bubble," Bank of Canada Governor Tiff Macklem said. "It doesn't mean there can't be a period where the market gets ahead of itself, and, and you see an entrenchment." Reporting by Balazs Koranyi; editing by Mark John and x x Our Standards: The Thomson Reuters Trust Principles., opens new tab

AI 'exuberance' risks ending in lengthy investment bust, BIS warns

Big Tech's AI spending spree risks ending in a damaging and lengthy "investment bust" that could rattle financial markets and damage the global economy, the Bank for International Settlements has warned. The Basel-based organisation, which advises the world's central banks, said the prospect of worse than expected returns in the tech sector could prompt investors to rapidly curb financing for AI companies, at a time when the five biggest "hyperscalers" are expected to invest more than $1tn from 2025 to the end of 2026. "Disappointment in returns could trigger a sudden pullback in financing and turn the capex [capital expenditure] boom into a protracted investment bust, with potential knock-on effects on financial conditions," the BIS said in its annual economic report on Sunday, as it laid out the risks of the "current AI exuberance". The warning comes amid mounting concerns over the scale of equity and debt issuance fuelling the AI revolution and the turbulence this is creating in global markets. Tech groups have flooded into the global credit market, raising hundreds of billions of dollars to fund AI projects, taking advantage of corporate credit spreads that are close to their lowest level this century. Record-high share prices have drawn them to the US equity market too, with SpaceX's blockbuster $86bn IPO earlier this month emblematic of roaring demand for stocks linked to the technology. Big investors have warned that this rush to issue debt could test investors' appetite, especially if the AI investment does not deliver an adequate return. Stock markets have been volatile since the SpaceX IPO and as investors digest growing expectations of interest rate increases by the Federal Reserve. Allianz's investment chief warned this week that SpaceX's decision to launch a $25bn bond sale so soon after its IPO was a sign that markets had entered "bubble territory". To date, optimism about AI has provided an important tailwind to global growth, the BIS added. The report acknowledged it was possible that AI could raise productivity "significantly" over the coming decade, given the efficiency gains it can provide to companies. But it said that historical episodes of investment booms provide "instructive parallels" -- among them the expansion of canals in the 1830s, railways in Britain in the 1840s and the dotcom boom of the late 1990s. These all had one key feature in common, said the BIS: "a genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify". It added: "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions." A major equity market correction associated with AI could have broader implications today than in the past, the BIS added, because households have greater exposure to shares relative to their wealth and income. Financial stability could also be endangered, given the volumes of debt being sold by AI companies to finance their investment, it warned. While the global economy has demonstrated surprising resilience despite shocks including the US-Iran war, the economic repercussions of the near-closure of the Strait of Hormuz trade chokepoint have not fully run their course given continuing energy disruption, the BIS warned. Prior to the war, about a fifth of the world's oil and liquefied natural gas supplies were shipped through the waterway. "The inflationary impacts are already being felt and could prove persistent," the BIS said. "Perils have grown with pressure points around risks of persistent inflation, the sustainability of AI-related investments, growing financial vulnerabilities and weakening fiscal positions," it added. Data visualisation by Alan Smith in London

What Went on at This Meeting of Powerful Central Bankers Won't Ease Your Mind About an AI Bubble

Central bankers are some of the most powerful people in the world, and we should all pay attention to what they're saying and hearing. With that in mind, I have troubling news. According to Reuters' Wednesday report from the European Central Bank's annual meeting in Sintra, Portugal, AI is being talked about like a thousand-mile-wide UFO hovering above Europe. According to Reuters, nearly every time anyone had a conversation, AI came up. Quotes collected by Reuters from scared and/or excited central bankers -- along with experts who attended the event -- are, well, chilling when taken all together. I've extracted the choice artifacts so they can be more easily dug up and studied after the dust settles. Crypto-loving U.S. Federal Reserve Chairman Kevin Warsh played the role of cheerleader, or perhaps bubble-inflator. "This is the biggest time of consequence to each of our economies, I think, in our lifetime," Warsh said, and added, "Who knew when the internet was born that the internet was going to create a million and a half jobs as Uber drivers? We are in the first to second inning of this revolution." Richard Tiffany "Tiff" Macklem, Governor of the Bank of Canada also compared what's happening now to the rise of the internet -- but in a laudatory way. "The internet proved to be better than anybody imagined, created whole new businesses, but we still got the dotcom bubble," Macklem said, adding a slight warning to his oddball assessment of one of the worst inventions in human history. And Tobias Adrian, Financial Counsellor and Director of the Monetary and Capital Markets Department of the International Monetary Fund (IMF) fretted about what will happen when banks run agents that make customer-facing decisions. "How do supervisors assess those kind of agentic loan decisions? They are a little ⁠bit black box. There's potentially a lack of explainability, and I think that is a key supervisory challenge." Computer has been saying no for many years. Does the dawn of the agentic version of computer says no really seem like a major shift? (Honest answer: Maybe). But according to Reuters, Itay Goldstein, Professor of Finance at the Wharton School of the University of Pennsylvania showed up with bubbles on his mind. If you think we're in one now, just you wait, Goldstein explained. "Something that is even more advanced and potentially more disturbing, is the ability of these algorithms to coordinate on a manipulative path of prices[...]. These algorithms indeed manage to achieve this kind of manipulation, creating bubbles leading to crashes, and this, I think, has more significant implications for financial stability." In this context, it's worth reading what Canadian commentator and novelist Cory Doctorow wrote late last year about a bubble. Just after pointing out that LLMs create applications -- and what he calls "plugins" -- that would be seen as pretty normal in normal times, he made a similar point to Goldstein's about an AI bubble as an economic force of nature, although he struck a slightly different tone. The bubble itself, according to Doctorow, "wants expensive, 'disruptive' things: Big foundation models that lose billions of dollars every year. When the AI investment mania halts, most of those models are going to disappear, because it just won't be economical to keep the data-centers running. As Stein's Law has it: 'Anything that can't go on forever eventually stops.'" A banker and economist named Torsten Slok of Apollo Global Management summed things up in even more eerie terms, according to Reuters, "If AI overdelivers, it will impact financial stability. If AI underdelivers, it will impact financial stability." See you at the bottom of the crater, everyone.

AI's hopes and fears take over the world's big central-bank gathering

At the ECB's Sintra forum, the people who set interest rates spent three days trying to price a technology that refuses to sit still. Every summer the world's most powerful central bankers decamp to a hillside town outside Lisbon to argue about the economy in relative calm. This year the argument had a single organising subject, and it was not inflation in the usual sense. It was artificial intelligence, and specifically the awkward fact that nobody in the room could say with confidence whether it will make their job easier or a great deal harder. The occasion was the European Central Bank's annual Forum on Central Banking, held in Sintra from 29 June to 1 July under the theme "Shaping Europe's future: innovation, growth and stability". On the marquee policy panel, Fed Chair Kevin Warsh, ECB President Christine Lagarde, Bank of England Governor Andrew Bailey and Bank of Canada Governor Tiff Macklem sat together to work through what AI actually means for growth, for prices and for financial stability. The tone was less triumphant than searching. The problem they kept circling is a genuinely hard one. AI promises a productivity boom that could, in theory, let economies grow faster without pushing prices up. Getting there, though, runs through an investment surge so large it is inflationary in the near term. The major AI firms committed roughly $300bn to capital spending in 2025 alone, pouring money into chips, power and data centres, and that spending lands as demand on the economy long before any productivity gains show up in the figures. So far the gains are real but modest. US output per hour rose about 2.2% last year, which looks more like a recovery from a weak patch than the step change the technology's boosters describe. Warsh said inflation remains too elevated even as Fed officials have grown more open-minded about AI eventually proving deflationary. Easing policy today on the strength of a productivity leap that has not yet arrived, most policymakers agreed, would be a risky bet to make with demand already running hot. Lagarde used her time to make a point that is uncomfortable for her own continent. Europe is lagging on AI investment and on the frontier companies driving the breakthroughs, she acknowledged, before adding that Europe and the United States are, in her phrase, "sort of hostage to each other" when it comes to making progress. It was a rare admission of dependence from a central bank chief who has spent years arguing for European strategic autonomy. The labour-market thread ran underneath all of it. A recent survey by the Federal Reserve Bank of New York found firms are not planning mass layoffs so much as quietly scaling back hiring, a shift that may already be feeding the unusually low rate of job creation in the US. That is a subtler kind of disruption than the wave of redundancies people tend to fear, and a harder one for a central bank to read in real time. None of this is abstract worry. The Bank for International Settlements has warned that a bust in AI investment could hit credit markets with a force comparable to 2008, and Lagarde herself has gone further, arguing that AI could trigger financial crises and calling for governance modelled on Cold War arms control. Others are already reaching for the technology as a fix rather than a threat. The Bank of Italy has opened talks with the big developers, pitching AI as a cure for chronic low productivity, while Morgan Stanley now expects European banks to shed a fifth of their jobs to it by 2030. What Sintra produced, in the end, was not a decision but a shared unease. The people who set the price of money left having agreed on the size of the question and very little about the answer. The data they need to resolve it does not yet exist, and by the time it does, the rates that hinge on it will already have been set.

The BIS warns an AI bust could hit credit markets as hard as the 2008 financial crisis

The BIS warned that an AI investment bust could be as disruptive to credit as 2008, flagging circular financing and poorly disclosed risk in its annual report. The Bank for International Settlements warned on Sunday that an AI investment bust could hit credit markets with disruption comparable to the 2008 financial crisis. In its annual report, the Basel-based institution listed AI-led risks alongside inflation and fiscal stress as "pressure points" that "demand attention." "Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions," the BIS said. It added that "a major equity-market correction could have larger macroeconomic consequences today than in the past." The report singled out what it called "circular financing" as a specific vulnerability. Chipmakers and hyperscalers take equity stakes in AI labs or neocloud providers, who in turn commit to multi-year purchases of chips or computing power from those same investors. Data centre construction is increasingly outsourced to third parties that lease facilities back on long-term contracts with embedded exit clauses. "The terms of such deals are typically poorly disclosed, with risks of the same asset being pledged multiple times," the BIS wrote. The AI boom's financial complexity has been escalating through record bond issuance, metered pricing shifts, and export controls that converged in June. The BIS warned that repricing of risk, "whether triggered by higher interest rates or an AI bust, has the potential to be similarly disruptive" to credit markets as the 2008 global financial crisis. The comparison is significant coming from the institution that serves as the central bank for central banks. BIS chief Pablo Hernandez de Cos highlighted inflation as a compounding risk, noting that the 2022 cost-of-living shock "is still in the memory of economic agents," which raises the probability of second-round effects from the current Middle East energy disruption. The report also flagged sovereign debt vulnerabilities, warning that hedge funds using "highly leveraged strategies that rely on short-term financing" now play a much larger role as buyers of government bonds, creating "risks of fire sales and de-leveraging feedback loops." The annual report landed on the eve of the European Central Bank's three-day symposium in Sintra, where global policymakers will scrutinise many of the same stability risks. AI stock concentration already exceeds dot-com-era levels, with the ten largest S&P 500 companies accounting for 36% to 40% of the index. The BIS's message is that the financial architecture supporting the AI boom, not just the equity valuations, carries systemic risk that regulators have not yet fully mapped.

The AI boom's historical warning

The risk is that AI follows the same pattern at a moment when the global economy is unusually reliant on a single investment boom to keep the expansion on track. Flashback: Some of the world's greatest technological breakthroughs -- canals, railroads, the internet -- sparked enormous investment booms, with capital pouring into new infrastructure years before the economic payoff became clear. What they're saying: "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions," the BIS wrote in its report. * "The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term." * If returns disappoint, today's AI spending surge could become "a protracted investment bust," with knock-on effects across the financial system, the BIS said. The big picture: Investors have bid up the valuations of companies expected to dominate AI, lenders have financed an unprecedented infrastructure buildout, and suppliers have expanded to meet that demand. * The bets have helped keep financial conditions loose and have supported the global economy. Friction point: If investors begin to question AI's payoff, the hyperscalers could pull back on spending. * That could leave engineering firms, data center developers and other suppliers that expanded to support the boom struggling to service the debt they took on to finance that growth. * Stress could spread through the fast-growing private credit market, where direct lending funds with exposure to AI borrowers have already begun facing redemption requests, forcing some to liquidate assets and return capital. * An AI-led stock market correction could stunt worldwide wealth: "With U.S. stocks accounting for an outsized share of global equity markets ... the wealth impact from a US-led repricing could propagate globally," the BIS wrote. Between the lines: Today's AI boom is unfolding through a highly concentrated ecosystem of hyperscalers, suppliers and private lenders linked by debt and increasingly opaque financing arrangements. * Those connections create more pathways for a slowdown to spread through financial markets at a time when policymakers are already confronting stubborn inflation, strained public finances and recurring supply shocks. * "Should inflation rise significantly or AI-led investment turn to a bust, the macroeconomic consequences could be amplified by existing financial vulnerabilities," the BIS noted. The bottom line: AI could ultimately deliver supercharged productivity that financial markets expect.

The central bank of central banks just released its flagship annual report -- and it sees a $1 trillion AI investment boom headed for a reckoning | Fortune

The canal mania of the 1830s. The British railway bubble of the 1840s. The dot-com crash of 2000. Each began with a genuine technological breakthrough that attracted more capital than commercial returns could ultimately justify. Each ended in a recession. The Bank for International Settlements -- the Basel-based institution that coordinates the world's central banks and serves as the global financial system's most authoritative watchdog -- sees the $1 trillion AI investment boom in the same lineage. And it's not subtle about the comparison. "The scale and pace of the current AI investment boom, accompanied by expectations of large productivity payoffs, bear resemblance to these precedents," the BIS writes in its Annual Economic Report 2026, released Sunday. "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions." A bet that's already outrunning the balance sheet The five largest hyperscalers are on pace to spend more than $1 trillion on AI-related capital expenditure across 2025 and 2026 combined -- a sum the BIS says is already outpacing their earnings and free cash flow, forcing some to issue debt to cover the gap. The BIS's concern isn't that AI is a fraud. The technology is real, and the report acknowledges that task-level studies consistently show productivity gains of 20% to 50% in time savings. But the concern is that every major hyperscaler is making the same massive bet simultaneously, driven by the perception that only a handful of players will ultimately dominate the market. That logic, the BIS warns, is a recipe for collective overcommitment. "The intense competition raises the risk of firms over-committing resources to investment projects with still uncertain returns," the report states, "leaving all firms vulnerable to disappointments in AI payoffs." Using contest-theory modeling, BIS economists find that as competitive pressure drives capital expenditure higher, the net economic surplus for the sector as a whole -- total payoffs minus investment costs -- declines and could turn negative in adverse scenarios. A disappointment in returns, the report warns, "could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust." The hidden wiring underneath What makes an AI bust particularly dangerous, the BIS argues, isn't just the scale of the spending -- it's how it's financed. Hyperscalers, chipmakers, and AI labs are linked through what the report calls "a complex web of private arrangements." The most prominent is circular financing: hyperscalers take equity stakes in AI labs, which in turn commit to multi-year purchases of chips or computing power from those same hyperscalers. Data centers are outsourced to third-party contractors that lease the facilities back under long-dated contracts with embedded exit clauses. "The terms of such deals are typically poorly disclosed," the BIS writes, "with risks of the same asset being pledged multiple times." If the hyperscalers slow or halt their aggressive capex deployment, the entire supply chain -- infrastructure contractors, chipmakers, AI labs, and the private credit lenders behind them -- would face simultaneous revenue shortfalls. The engineering and construction firms at the end of that chain are particularly vulnerable, carrying "comparatively weak" balance sheets with little cushion against a sudden reversal. BIS Asia-Pacific representative Zhang Tao told the South China Morning Post that a correction could unwind "much faster than previous banking crisis episodes" -- precisely because so much of the financing flows through hedge funds and private credit vehicles that carry less regulatory oversight than traditional banks. Such warnings are commonplace across Wall Street. Apollo Global Management Chief Economist Torsten Slok, for example, argued in mid-May that AI was "penetrating every corner of financial markets," with an equity market phenomenon mutating into a capital markets-wide transformation. Meanwhile, AI accounts for nearly half of all investment-grade bond issuance, 87% of venture capital funding, and a growing share of high-yield debt. The wealth effect problem The financial fallout wouldn't stay contained in Silicon Valley or on hyperscaler balance sheets. U.S. stocks now account for roughly 64% of the MSCI Global index, and household equity exposure has more than doubled relative to income since 2010. A major repricing of AI-related stocks, the BIS warns, "could have more pronounced wealth effects and sharper consumption pullback than in the past." And given the U.S. market's global footprint, the wealth destruction would propagate internationally. Direct lending funds -- already a $1 trillion-plus ecosystem -- have quadrupled their lending to the AI and IT sectors over the past five years, now representing about 15% of their portfolios. Signs of stress are already visible: some retail-facing direct lending funds have faced mounting redemption requests, forcing asset liquidations. "A larger shock," the BIS writes, "whether from a renewed inflation surge or a sharp AI-led repricing, could trigger a more widespread credit crunch." The Hormuz complication The AI risk doesn't exist in a vacuum. The report's opening chapter documents a second major shock that arrived in early 2026: the closure of the Strait of Hormuz following the start of the Iran conflict in late February, which cut more than 10 million barrels of crude oil per day from global supply -- a larger disruption than either the 1973 oil embargo or the 1979 Iranian revolution. Oil prices surged 67% to an intraday peak of $120 a barrel within two weeks. Fertilizer and plastics prices both soared 50%. Global headline inflation has jumped by half a percentage point since the conflict began. The energy shock and the AI risk interact in an uncomfortable way. Financial markets have remained buoyant -- equity valuations rich, credit spreads compressed -- on the assumption that the Hormuz disruption is temporary and that the AI boom will continue. But if inflation proves stickier than expected and central banks are forced to raise rates, the same tightening that's needed to contain energy-driven inflation could be what pops the AI-financed debt bubble. "The current tension between exuberant risk appetite and elevated macroeconomic risks," the BIS writes, "could unwind abruptly." The BIS stops short of calling the AI boom a bubble outright. Its prescription is for "robustness" -- a word it uses carefully and repeatedly to describe what it wants policymakers to build beyond the fragile "resilience" the global economy has demonstrated so far. That means central banks staying vigilant on inflation even when it's politically uncomfortable, governments restoring fiscal space rather than deploying stimulus, and regulators extending prudential standards to the non-bank financial institutions now sitting at the center of AI financing.

Americans Increasingly Alarmed About Tech Industry's Looming AI Bubble

Can't-miss innovations from the bleeding edge of science and tech From coast to coast, the people of the United States are growing resentful of AI. It's not hard to see why: they're constantly told the tech will take their jobs and leave them for broke, while the data centers used to train them hike up their utility bills and belch horrid fumes into their communities. Then there's the harrowing economics of AI, infinitely less tangible but impossible to ignore. With over $1 trillion shoveled into AI so far, it's increasingly difficult not to wonder: was it a good idea for one of the world's richest countries to go all-in on this stuff? Evidently, the public isn't so sure. A recent poll conducted by the news platform Haystack News found that the overwhelming majority of respondents are terrified about the threat of an AI bubble: the massive gap between AI spending and AI's actual return on investment. They're not wrong to be concerned. While financial analysts have long warned that the AI bubble could spell disaster for Wall Street and the tech industry overall, the mismatch between funds allocated and revenue generated has grown so large that some experts warn it could easily spark an economic meltdown. As the polling shows, everyday Americans are keenly aware of any potential ripple effects, with 55 percent of the over 4,100 respondents saying they're "very concerned" about a bubble in the AI industry. An additional 14.5 percent said they were "somewhat concerned," while a piddling 9.4 percent were "not very concerned." Bearish observers of the AI industry may have gotten their first taste of things to come on Tuesday, as a broad stock market scare wiped nearly $1 trillion in market value off the books. That sell-off was fueled by falling shares in AI-heavy companies like Amazon, Nvidia, Tesla, Alphabet, and Intel. Even Elon Musk's freshly-listed SpaceX briefly dipped below its IPO price of $150. Whether tech stocks continue to plummet in the short term is anyone's guess. Long term, it clearly doesn't take a Wall Street wiz to read the writing on the wall.

The AI boom could trigger the next crash, central banks warn

The vast surge of investment in AI, which has powered global stock markets to record highs, risks ending in a financial bust, the Bank for International Settlements warns, as the build-up's hidden costs begin to surface in company accounts and consumer prices alike. In its Annual Economic Report, published on Sunday, the Bank for International Settlements (BIS), known as the central bank for central banks, warned that the enormous spending on AI is accumulating financial vulnerabilities that could amplify any future shock and spread from markets into the wider economy. Presenting the findings, BIS general manager Pablo Hernández de Cos said the message was one of "urgency", with policymakers urged to act before any reversal makes the eventual adjustment more painful. At the core of the warning is the scale of the spending, despite massive investment having supported global growth over the past year. The five largest "hyperscalers", the technology giants racing to build AI infrastructure, are on track to commit more than $1 trillion (€878bn) to AI-related investment across 2025 and 2026, a pace that is outstripping their earnings and free cash flow and pushing some to borrow heavily to keep up. The BIS suggests this race is fuelled by a belief that only a handful of dominant players will ultimately prevail, encouraging firms to pour money into projects whose returns remain deeply uncertain. Echoes of past manias The report sets today's AI boom against a long historical lineage, from the canal mania of the 1830s and Britain's railway mania of the 1840s to the electrification of the 1920s and the dotcom bubble. Each began with a genuine technological breakthrough that attracted more capital than commercial returns could justify, the BIS notes, with each episode ending "with an eventual reversal in investment, inducing economy-wide recessions". Compounding the danger are stretched share prices and opaque financing. The BIS highlights the spread of "circular financing", in which chipmakers and cloud giants take equity stakes in AI labs that then commit to buying their chips and computing power, effectively recycling money back to the original investors as revenue. Much of the funding now flows through hedge funds and private credit vehicles that face lighter scrutiny than banks. According to Zhang Tao, the BIS chief representative for Asia and the Pacific, that reliance on non-bank channels means an AI downturn could unwind into a sharper, faster crash than a traditional banking crisis. The hidden costs of data centres Beyond financial markets, critics argue the true cost of the AI build-out is being obscured in plain sight. A central concern, examined by the Wall Street Journal, is how the technology giants account for their data centres. By assuming the expensive equipment inside them will stay useful for longer, firms can spread its cost over more years, lowering the depreciation charged against profits in any given period and making earnings look healthier than the underlying cash burn implies. However, the specialist chips at the heart of these facilities may become obsolete far faster than those extended schedules assume, leaving a gap between reported profits and economic reality, as well as a balance sheet more exposed than it appears should demand disappoint or a sizable need to replace hardware arise. The physical scale is staggering. Columbia University economist Stijn Van Nieuwerburgh estimates the build-out could cost in the region of $8 trillion (€7tn) over the next six years, financed in part through the kind of off-balance-sheet arrangements the BIS flagged. The costs are also no longer confined to corporate accounts. Some economists now warn of a so-called "third wave" of inflation, after the pandemic and tariffs, driven this time by the AI build-out. As chip manufacturers prioritise high-margin parts for AI servers, the resulting squeeze on memory and storage has rippled out to consumer electronics. For example, Apple raised prices on its MacBooks, iPads and other devices last week, citing an "extraordinary surge in demand for memory and storage" and saying it had "never seen a component price increase this much, this quickly". The company's shares fell around 6%, their worst day in over a year, as Microsoft, Nintendo and Sony have also made similar moves. Beyond hidden costs and inflationary pressures, where the strain may spread furthest is raw power. Goldman Sachs expects data centres to account for nearly half of the growth in US electricity demand by 2030, with consumer power prices forecast to rise around 6% a year through 2026 and 2027. The BIS itself notes that the build-out's hunger for electricity is already pressuring prices and input costs, with potential spillovers to inflation, though it stresses, as do many economists, that AI could yet prove disinflationary if its promised productivity gains eventually arrive.

Big Tech is all in on AI. Now all they need is customers.

Aimee Picchi is the associate managing editor for CBS MoneyWatch, where she covers business and personal finance. She previously worked at Bloomberg News and has written for national news outlets including USA Today and Consumer Reports. This week's selloff in technology stocks underscores a gnawing anxiety among investors: What happens if you throw a big party and few people show up? The Nasdaq Composite Index has slipped nearly 3% this week as Wall Street frets over whether the trillions of dollars going into artificial intelligence will deliver the revenue and profit growth needed to justify that exorbitant cost. Goldman Sachs estimates tech companies will spend $7.6 trillion through 2031 to build thousands of new data centers to power the rise of AI. But fresh data is raising questions about whether enough consumers and businesses are willing to pay up for these services, even as the tech giants leading the AI charge borrow heavily to build the required infrastructure. "There's concern around how much hyperscalers are turning to debt markets in order to finance the infrastructure buildout," Kate Brennan, associate director of independent research institute AI Now, told CBS News, referring to the tech companies driving the torrent in AI capital spending -- Alphabet, Amazon, Meta, Microsoft and Oracle. She added, "The returns are not coming in, and the claims that are being made, in terms of efficiency or productivity numbers, are not netting out." Brennan also pointed to rising skepticism among some consumers and workers about the utility of AI. To be sure, Americans are increasingly using AI, but for now few appear willing to pay for it. That reluctance is coupled with what polls show are major public concerns with AI: 40% of adults think the technology will be a negative societal force over the next two decades, versus 16% who believe it will be positive, according to Pew Research. Meanwhile, more companies are laying off workers and investing in AI instead, heightening concerns about the technology's impact on jobs. For employers, the payoff is uncertain. A May study from tech research firm Gartner found that businesses that replace workers with AI agents often fail to generate a return on investment. One takeaway is that many consumers are using AI less out of a desire to chat with a bot than because there's simply no escaping the technology, Brennan said. Enter a search query on Google, and you'll get an AI response at the top of the page. Call a company's helpline, and chances are that you'll get an AI agent with a soothing voice accompanied by fake typing in the background. "The current push for AI adoption that we're seeing is directly coming from the financial incentives of AI firms," she added. Because of the massive capital expenditures, the hyperscalers and other AI firms are making a "deliberate push for AI everywhere -- no matter whether the demand is there or if customers want it or not." Bubble or bust? Wall Street has long worried about an AI bubble as companies like Alphabet and chipmaker Nvidia have repeatedly propelled the U.S. stock market to new records. To some investors, the current moment is analogous to the dotcom bubble of the late 1990s. While many of those early Internet high-flyers flamed out, the ones that survived -- think Amazon and Google -- eventually became profitable businesses or even household names. As with that earlier boom-and-bust cycle, the AI landscape is likely to yield uneven outcomes, according to Qian Wang, global head of capital market research at Vanguard, and senior global economist Kevin Khang. "Some firms may emerge as more profitable and with significant competitive advantages, while others could find their core businesses obsolete in a new AI economy," they said this week in a report. "As we continue to learn what the economics of AI look like in practice -- the trajectory of AI capital expenditure, how effectively hyperscalers can monetize AI investment, and the size and shape of AI's addressable market -- the market's sensitivity to the ups and downs is likely to be significant." They added, "Investors should expect a bumpy ride." The payback test A key question underlying the lofty valuations of the hyperscalers and other AI companies is whether their capital spending plans reflect realistic revenue forecasts, according to economist Ed Yardeni of Yardeni Research. Companies including Alphabet, Amazon, Meta and Microsoft are spending heavily on data centers and chips in expectation of strong demand for AI services, while large language model developers like OpenAI and Anthropic pay to use their data centers. Yet it remains to be seen whether consumers and businesses will ultimately generate enough revenue to justify those investments. "The AI ecosystem falls apart if the expected end-user demand for the AI/LLM products does not materialize or if prices for their offerings fall sharply below expectations," Yardeni said in a note to investors. Yardeni's team examined annualized revenue estimates for OpenAI and Anthropic to assess whether they're adding users fast enough to cover their spending commitments with the hyperscalers -- what he calls a "capex payback test" to check whether these companies can support the industry's capital expenditures. Their conclusion: Not right now, but the picture will improve in several years if current growth forecasts hold. "We find that the AI ecosystem is not fully end-user revenue-backed yet, but it is not entirely speculative either," Yardeni said. "Expected 2030 revenues make the math look much better. But those forecasts depend on a big assumption: AI revenues must continue to scale, and compute efficiency must improve, or both."

BIS Warns AI Debt Bubble Could Spark Global Financial Crisis

The AI investment surge is a potential flashpoint for systemic risk, "as financing has relied on enormous debt and highly leveraged nonbank structures that can rapidly unwind," one analyst said in response to the report. The Bank for International Settlements has warned that artificial intelligence "exuberance" could have major financial consequences, as heavy reliance on debt financing in AI ventures raises the risk of cascading defaults if investor optimism fades. The five largest hyperscalers are set to spend more than $1 trillion on AI-related capital expenditures from 2025 through 2026, and these commitments are outpacing earnings, the Basel-based institution said in its annual economic report released Sunday. "Equity valuations are elevated, particularly for firms at the core of AI development ... sustaining such high growth could become increasingly challenging," the bank said. AI investment enthusiasm has surged with the recent SpaceX IPO and planned public offerings from Anthropic and OpenAI, leading some market observers to draw parallels to previous boom-bust cycles such as electrification exuberance in the late 1920s and the dot-com bubble in the late 1990s. The global economy displayed "surprising resilience" in 2025 despite successive shocks, partly driven by AI investments, the bank said. However, "perils have grown" in 2026, with concerns over the risks of persistent inflation, which rose to a three-year high of 4.2% in the US in May, according to TradingEconomics. The sustainability of AI-related investments, "growing financial vulnerabilities and weakening fiscal positions," has added to those perils, the BIS report said. "Should inflation rise significantly or AI-led investment turn to a bust, the macroeconomic consequences could be amplified by existing financial vulnerabilities." Rapid AI boom raises questions about its sustainability. Source: BIS If central banks tighten policy to contain inflation, this could precipitate a "sharp pullback in [AI] asset prices after a prolonged period of exuberant risk-taking," which could trigger "disruptive macro-financial feedback loops," the BIS said. "A reversal of AI optimism could likewise have major financial consequences, given AI firms' rising leverage and growing footprint in credit markets." A potential flashpoint for systemic risk The BIS cautioned that a large correction in AI valuations could have more pronounced wealth effects and a "sharper consumption pullback" than in the past, given US market dominance. "Financial stability could also be at risk in the event of an AI bust." Nick Ruck, director of LVRG Research, told Cointelegraph that the BIS was right to flag the AI investment surge as a potential flashpoint for systemic risk, "as financing has relied on enormous debt and highly leveraged nonbank structures that can rapidly unwind and amplify this cycle into a crisis." "The current macroeconomic environment is already fragile from being stretched by inflation, record national debt, and disrupted commodity markets, so a bust of the AI capital stack could send shockwaves through an already strained global economy." The BIS also cautioned about stablecoins, which risk fragmenting the global monetary system and could weaken sovereign monetary control, it said. Chipflation could compound the problem The AI industry could also become a victim of its own success, as surging semiconductor and memory chip prices, driven by increasing AI data center demand outstripping supply, could compound inflation, which consumers will ultimately have to bear. This phenomenon, known as "chipflation," is causing prices for devices from smartphones to laptops to climb, Morgan Stanley analysts cautioned earlier in June. In March, BlackRock reported that surging semiconductor prices were "posing upside risks to global goods inflation." Meanwhile, Apple is already passing costs on to customers by hiking prices. The tech giant announced Thursday that a wide array of products, from iPads to Macs and home devices, would see increases from 18% to nearly 33% due to soaring memory and storage chip costs. Price jumps for DRAM chips defy deflationary price dynamics. Source: BlackRock

The AI boom won't burst all at once. It will pop in 'rolling bubbles': Macquarie

Macquarie expects the AI investment boom to unwind through a series of "rolling bubbles" rather than a single crash, as different segments of the AI ecosystem heat up and cool down over time. Global AI investment has surged to about $850 billion in 2026, far exceeding historical technology booms. The AI investment boom is unlikely to end in a single dramatic crash; instead, Macquarie argues it will deflate through a series of "rolling bubbles" as different parts of the AI ecosystem surge and then lose steam. Global AI-related investment is now running at about $850 billion in 2026, roughly $500 billion above the pre-AI trend, making it larger and faster than historic manias such as railways, canals, and the dot‑com boom, said Macquarie analyst Viktor Shvets in a report. Corporations, especially US hyperscalers, are rapidly exhausting internal cash, with debt issuance expected to reach around $180 billion and capex-to-revenue ratios climbing above 50%, underlining how aggressively AI is being funded. Yet, annualised AI revenues are already estimated at close to $175 billion, enough to cover current operating expenses and depreciation, and growing roughly three times faster than previous IT waves, suggesting the boom is not purely speculative. Also Read | Chris Wood's big warning: The specific risk that will finally trigger the end of AI trade BIS warning: overextended but not empty The Bank for International Settlements has warned that AI now exhibits classic bubble characteristics, with extremely rapid capital deployment and increasingly complex off‑balance sheet vehicles and circular investment structures, which Macquarie says likely make current investment figures understated and more fragile than they appear. "AI is a bubble that could suddenly derate, with considerable consequences for markets and economies," the note cautions, framing the current cycle as historically extreme in both scale and speed. However, Macquarie stresses that adoption is running ahead of typical bubble patterns, with a $2 trillion contract backlog and heavy spending on data centres, memory and logic chips already visible in hard orders rather than just hype. Economic impact still small, labour strains rising Despite its market prominence, AI still accounts for a relatively modest share of overall economic activity, even as it increasingly shapes expectations for GDP growth and productivity. Macquarie warns that the real pressure points are emerging in labour markets, where lower hiring rates, declining education premia and signs of rising social polarisation point to early evidence of AI-related disruption that is not yet fully captured in official statistics. The report argues that AI risks driving "declining marginal utility and compensation of labor," with job insecurity and wage pressures likely to intensify as automation scales. China's cost shock: commoditisation is coming Macquarie sees a major structural threat in China's push to commoditise the AI stack, much as it did in solar, electric vehicles and batteries. On the latest data, China's Z.ai and Tulongfeng systems are now matching the cybersecurity features of leading US model Mythos, with the US technological lead potentially narrowed to around 10-15%. Given China's structurally lower cost base, this helps explain the rapid proliferation of its open‑weight models, which are being deployed primarily as cost‑efficiency tools, and underpins Macquarie's view that pricing power in large language models - and ultimately in chips - will erode sharply. 'Rolling bubbles': from LLMs to applications Macquarie's central thesis is that the AI cycle will break not through one big burst but via a sequence of overlapping bubbles across the value chain. "We view AI as a sequence of 'rolling bubbles': LLMs to facilitators and applications. As one bubble deflates ... others will pick up the mantle, until these bubbles also deflate," the report says, noting that the market's leadership is already rotating. The so‑called Magnificent Seven have fallen from 36% of US market capitalisation to about 32%, while broader indices such as the S&P 500 and NASDAQ are showing phases where relative performance periodically shifts as leadership passes between segments. In Macquarie's view, periods between bubbles and shifts in monetary policy - for example when the US Federal Reserve tightens - may briefly broaden equity returns, but these will be "exceptions not the rule" in a cycle characterised by persistent concentration. Against that backdrop, the house outlines three broad approaches for investors navigating the AI boom: "day trade around headlines", "go passive" or "go thematic", reflecting a market environment where timing, diversification and exposure to structural themes may matter more than traditional stock‑picking. With no "reset button" in what it describes as an "age of extremes", Macquarie concludes that investors should expect elevated volatility and serial repricing rather than a single, definitive end to the AI story.

AI investment boom may fuel financial risks: BIS

The Bank for International Settlements (BIS) has cautioned about the financial dangers linked to the rapid growth of AI, pointing to issues of overinvestment and high valuations. There's a growing worry that advanced AI models could increase cyber threats, calling for stronger collaborations. New Delhi: The Bank for International Settlements (BIS) has flagged financial vulnerabilities associated with AI-related financing, warning that the race to capture market share may have led to overinvestment, sowing the seeds of a sector-wide bust if returns disappoint. "This is one of the pressure points we see facing the global economy," Tao Zhang, chief representative of BIS for Asia and the Pacific, said, adding that there are financial vulnerabilities associated with AI-related financing. "Risk premia are compressed, asset valuations are stretched, and the financing of AI is increasingly leveraged and features complex interactions within the AI supply chain, " he said. The BIS has therefore highlighted the need for macroprudential policies to lean against persistently strong risk appetite and stressed the importance of greater transparency in private credit markets, particularly in sectors such as AI, Zhang said. Impact of frontier AI models According to Zhang, frontier AI models can increase the speed, scale and complexity of cyber-attacks. Given the financial system's role as critical infrastructure, regular cooperation is essential. He said the same tools could strengthen cyber defences by helping detect and fix vulnerabilities. The net impact on systemic cyber risk depends on several factors, not least the computing power available to attackers and defenders. "Both domestic and international coordination on cybersecurity are critical. That was the case before frontier models came onto the scene, and it remains so now. At the domestic level, the financial industry, central banks and financial supervisors should collaborate with national security agencies and other stakeholders to accelerate vulnerability remediation and strengthen core cyber hygiene practices," Zhang said. West Asia and supply chains Zhang said the West Asia conflict has exposed the risks of relying on a handful of critical trade routes and warned that the inflationary impact of such shocks could outlast the initial disruption. Despite signs of easing geopolitical tensions and a sharp fall in oil prices, the effects of the disruption may have further to run, he said. "Inflation has risen. This increase could become persistent if businesses pass on higher input costs. This could sustain inflation pressures well after energy flows and oil prices normalise," Zhang cautioned. On the policy front, he said central banks must prioritise medium-term price stability to anchor inflation expectations. "Monetary policy must be complemented by sound fiscal and macroprudential policies to lay the foundations for sound and sustainable growth," he said. The conflict in the Middle East and disruptions associated with the closure of the Strait of Hormuz show how dependence on a small number of critical transit routes can create risks extending beyond oil and gas markets, Zhang said. "Disruptions to critical inputs can create chokepoints that affect broader production networks, regardless of the economic value of the individual component involved. Asian economies are particularly exposed to such disruptions," he said. Stronger supply chains would help economies such as India weather supply-side disruptions, while such shocks may become more frequent in the years ahead, Zhang said. "More robust global production networks would help economies, including India, weather supply-side disruptions that may become more frequent in the years ahead."

BIS Warns That AI Spending May Not Be Sustainable | PYMNTS.com

In its annual report published Sunday (June 28), BIS names AI as one of four pressure points facing the global economy. "Optimism surrounding AI may not last, despite its promise of future productivity gains," BIS said in a news release accompanying the report. "The current surge in capital expenditure could prove unsustainable if supply bottlenecks restrain production. And intense competition for market leadership may fuel over-investment, as seen in previous innovation waves." The report singles out the "opacity" of financing in the AI space, where hyperscalers, chipmakers and AI labs are connected in "a complex web of private arrangements," including what it called "circular financing" deals. In these deals, chipmakers and hyperscalers take equity stakes in AI labs or neocloud providers, in exchange for multiyear purchases of chips or computing power. "The terms of such deals are typically poorly disclosed, with risks of the same asset being pledged multiple times," the report said. "Together, such arrangements account for a sizable share of sector-wide financing and forward revenue." Beyond AI, the other "pressure points" cited by BIS are rising inflation, the threat of fragile liquidity in core bond markets, and "near-record high public debt" and higher interest rates. Meanwhile, a new analysis from Wedbush Securities finds that most enterprises have not yet established a way to determine whether they've reaped a good return on their AI investments. That analysis, the subject of a recent Seeking Alpha report, showed that these companies have invested in AI pilots without a framework for measuring success and that without such a framework, they are likely to run into difficulties in justifying the investment. "Many executives noted that customers are feeling increased pressure from their boards and CFOs to demonstrate actual returns from AI, and the inability to answer this question presents a real barrier to additional investments in long-term technological buildouts," wrote Wedbush Analyst Dan Ives, per the report. Research by PYMNTS Intelligence has found that most enterprise executives have realistic expectations for when they expect positive payback from their AI investments, with more than 80% saying it could take between three and 10 years. "These enterprise executives also understand that big-'T' transformation doesn't usually happen on a predictable timetable, nor with the expectation of an immediate or direct payback 'in the millions,'" PYMNTS CEO Karen Webster wrote last year. For all PYMNTS AI coverage, subscribe to the daily AI Newsletter.

The Bank for International Settlements worries about potential effects of AI debt

The Bank for International Settlements published its Annual Economic Report on June 28, warning that the AI boom is becoming a source of financial instability. That alone is not surprising. What is surprising is the specific mechanism the BIS is worried about: not whether AI pays off, but who will take on the debt if it doesn't. The BIS calls itself the central bank for central banks. When it flags a funding structure as a systemic risk, regulators tend to listen. What is an AI bubble? An "AI bubble" does not mean AI stops being useful. It means the money funding AI infrastructure grows faster than the cash flow that infrastructure generates, and investors keep paying anyway. That gap is now measurable. According to a BIS bulletin published this year, AI hyperscalers have ramped up capital spending so sharply that free cash flow has recently lagged capital expenditures in absolute dollar terms. These firms historically ran with less debt than typical companies, funding growth from their own profits. That model is breaking. The BIS bulletin states plainly that the sheer scale of AI investment is testing the limits of what cash flow alone can support. How the financing quietly shifted from cash to debt When cash flow cannot keep up, companies borrow. Hyperscaler corporate bond issuance topped $100 billion in 2025, according to the BIS Quarterly Review, mostly in long-term debt locking in funding for multi-year data center build-outs. That number matters because credit default swap spreads on these bonds also rose during the same period, the BIS found, signaling that bond investors are pricing in more uncertainty about whether the projects will pay off. The bigger shift is what is happening off the balance sheet. Hyperscalers are increasingly using joint ventures and special-purpose vehicles, capitalized by private credit firms, to build data centers without the debt showing up on their own books, per BIS research. The debt does not disappear just because it is harder to see. Private credit funds originated more than $40 billion in loans to AI-related companies in 2025 alone, according to BIS data, a fivefold jump in a market with far less disclosure than public bond markets. Richard Newstead / Getty Images The hidden loop of circular financing A related concern is circular financing, where chip and cloud giants take equity stakes in AI startups that then spend that same capital buying chips or compute from the investor, as Bloomberg has reported. The risk is that these deals can inflate the appearance of demand. Revenue looks real on paper, but a chunk of it is the investor's own money moving through one company and back into another. Why this structure worries central bankers Banks are regulated, monitored, and required to hold capital against losses. Hedge funds and private credit vehicles are not subject to the same oversight, which is exactly the BIS's concern. BIS General Manager Pablo Hernandez de Cos told reporters the message is one of "urgency," because today's debt is increasingly financed through what the BIS terms non-bank financial intermediaries. Frank Smets, the BIS's acting head of monetary and economic department, separately warned that record sovereign debt combined with leveragedhedge fund activity in bond markets has created what he called a "sovereign-financial stability nexus," raising the odds of sharp, sudden swings in government bond prices. Zhang Tao, the BIS's Asia-Pacific representative, made the comparison explicit in remarks to the South China Morning Post: if AI sentiment turns, the interconnectedness of these non-bank channels could make a correction move faster than the 2008 banking crisis did. For investors, the takeaway is not that AI demand is fake. It is that the speed of any repricing now depends on plumbing most people never look at. Here are four numbers worth watching: * Hyperscaler bond issuance crossed $100 billion in 2025, locking in long-term debt against AI infrastructure that has not yet proven its return. * Private credit originations to AI companies exceeded $40 billion in 2025, a market with limited public disclosure compares to bonds. * Credit default swap spreads on hyperscaler debt rose through the review period, a market signal that bond investors are pricing in more risk. * The BIS explicitly urged policymakers to extend oversight beyond traditional banking, a direct nod to private credit's growing role. The bigger pattern Every infrastructure boom eventually outgrows the balance sheets that started it, from railroads to telecom fiber to housing. What separates this one is the BIS naming the exact channel, non-bank private credit, that previous crises took years to identify after the damage was done. The central bank of central banks rarely names a specific financing structure as a watch item this early. The open question is whether regulators move fast enough to add oversight before the debt comes due, or whether they are once again diagnosing a bubble only after the air starts leaking out. The Arena Media Brands, LLC THESTREET is a registered trademark of TheStreet, Inc. This story was originally published June 29, 2026 at 9:03 PM.

AI hopes and fears dominate global central bank meet

SINTRA, Portugal, July 1 (Reuters) - Seeping into just about every conversation at this week's meeting of the world's top central bankers was one big unknown: how artificial intelligence will impact the world economy and therefore their mandate to ensure financial stability. The consensus of those discussions at the ECB's annual conference in the windy hills of Portugal was that AI has the power to disrupt everything and create problems they can't even imagine right now: in financial and labour markets, in bank lending, for security, and even for power demand. "If AI overdelivers, it will impact financial stability. If AI underdelivers, it will impact financial stability," Torsten Slok at Apollo Global Management told the arbiters of interest rates around the world at one of the main panel sessions in the resort of Sintra. AI was such an overarching theme in Sintra that the topic found its way into every discussion, from immigration and supervision to climate. It even outdid new Federal Reserve Chairman Kevin Warsh, making his debut meeting with fellow central bankers, as the clear star of the three-day show. While AI can improve every corner of life, the fear of many speakers was that it can also disrupt it, at times illegally, and that finance officials have few if any tools to stop it. "This is the biggest time of consequence to each of our economies, I think, in our lifetime," Warsh said about the AI revolution. "Who knew when the internet was born that the internet was going to create a million and a half jobs as Uber drivers? We are in the first to second inning of this revolution," he told the ECB Forum. INFLATING BUBBLES In the case of trading, automation is already running most functions. But an AI-driven boost could inflate bubbles at warp speed, then crash them, profiting both on the way up and on the way down in a type of collusion that is now illegal. "Something that is even more advanced and potentially more disturbing, is the ability of these algorithms to coordinate on a manipulative path of prices," University of Pennsylvania professor Itay Goldstein said. "These algorithms indeed manage to achieve this kind of manipulation, creating bubbles leading to crashes, and this, I think, has more significant implications for financial stability," he added. One potential bubble AI is already creating is that of AI stocks, in part generated by massive capital spending on the building blocks of AI, which Slok estimated had added one percentage point to U.S. GDP alone. While valuations have retreated in recent weeks, experts liken the rapid rise in pricing to some of the biggest asset price busts in history, like the British railway mania of the 1840s, the roaring 1920s or the dotcom boom. "The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term," the Bank for International Settlements said in a report. SUPERVISING THE UNEXPLAINABLE AI will also help -- but complicate -- lending. Banks will be able to do more sophisticated credit analysis and extend funding to borrowers now outside their traditional sphere. But supervising this will be a nightmare. "How do supervisors assess those kind of agentic loan decisions? They are a little bit black box. There's potentially a lack of explainability, and I think that is a key supervisory challenge," Tobias Adrian, a senior IMF official, said. AI will also drive a wedge between richer and poorer firms and countries. Defending against malicious threats will become even more expensive, and otherwise viable firms will struggle to protect themselves. "When you think of the most outrageous attacks, they're often attacking the weakest link," Adrian said. Sarah Breeden, a Bank of England Deputy Governor, said a potential solution may be to create some sort of insurance scheme, likening it to deposit insurance in case of bank failures. "In a cyber context, do we need systems that allow one institution to pick up another's basic functions during disruption?" she said. But the ultimate risk is that the excessive success of AI could fundamentally undermine the global economy. If AI delivers on some of the most optimistic efficiency expectations, machines could replace humans en masse, leading to large unemployment. This then reduces disposable incomes and pushes the economy into recession, undermining the case for the investment. But if AI is less successful, then the massive investment into the sector fails to deliver the expected returns. "The internet proved to be better than anybody imagined, created whole new businesses, but we still got the dotcom bubble," Bank of Canada Governor Tiff Macklem said. "It doesn't mean there can't be a period where the market gets ahead of itself, and, and you see an entrenchment." (Reporting by Balazs Koranyi; editing by Mark John and x x) By Balazs Koranyi and Francesco Canepa

BIS Sees Peril for Economy, Financial System in AI Investment Boom

Fierce competition to dominate artificial intelligence risks driving investment spending to excessive levels, threatening the profitability of leading firms and a sharp reversal that could tip some economies into recession, the Bank for International Settlements said Sunday. In its annual report on the global economic outlook, the Switzerland-based research and coordinating body for central banks said the five largest "hyperscalers" are on course to devote more than $1 trillion to AI-related capital expenditure in 2025 and 2026. "The race to capture market share may have led to overinvestment," said Pablo Hernández de Cos, general manager of the BIS. "This could leave the sector more vulnerable if AI under delivers, possibly bringing the current investment boom to an abrupt end." The BIS noted that previous episodes in which very large sums were quickly invested in new technologies-such as canal construction in the 1830s, British railways in the 1840s, electrification in the late 1920s and the dotcom boom of the late 1990s-all led to busts with severe consequences. "These episodes ended with an eventual reversal in investment, inducing economy-wide recessions," the BIS said. "The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term." While comparable to earlier technologies in the potential for harm if returns underwhelm, economists at the BIS said AI is potentially very different in its longer-term economic effects. "If, at some point, AI systems can improve their own capabilities and "create" technology and ideas, the macroeconomic consequences could be profoundly different from past innovations," they wrote. "A key constraint on long-run growth, namely the rate at which humans can generate new ideas, could be lifted." The BIS said the valuations in equity markets suggest a level of "complacency" among investors about the risks they face. Its warnings come amid a period of volatility in global tech stocks as investors worry that AI profits may disappoint given the very large sums invested. A big decline in equity prices could have more negative consequences for the economy than past corrections of a similar scale, the BIS said. "Household equity exposures have grown over the past few decades, both relative to total wealth and income," it said. "A large correction in valuations could have more pronounced wealth effects and sharper consumption pullback than in the past." The economic fallout from a correction would likely not be confined to the U.S., even though most of the big AI players are based in the world's largest economy. U.S. equities account for a disproportionately large share of global market capitalization, so a sharp fall in prices would likely be felt by investors around the world. However, the BIS did not recommend that central banks should raise borrowing costs in an effort to tame the investment boom, citing high levels of uncertainty about its consequences. "Trying to be prescriptive now about how central banks should react is unwise," Hernández said. While disappointing profits could lead to a sudden withdrawal of financing for investments, the BIS said the rapid development and deployment of AI faces other challenges, including shortages of energy and parts. "The AI buildout has recently been facing growing bottlenecks in electricity, advanced semiconductors and grid equipment," the BIS said. "These temporary shortages may also amplify overinvestment, as firms attempt to lock in future capacity through long-dated contracts that further expose them to any disappointments in demand." The voracious appetite for energy and chips also threatens to fuel inflation at a time when the conflict in the Middle East has already pushed the rate of price increases well above central bank-targets. "Fast-growing demand for computing power is already pressuring electricity prices and input costs, with potential spillovers to inflation," the BIS said. While the early stages of AI development were largely funded internally, the increased scale of investment plans has led to a greater reliance on borrowing. That means that a bust could destabilize the financial system, particularly since it could spread to firms that build data centers and supply hardware. "Should hyperscalers slow or halt the aggressive pace of capex deployment, many borrowers across the supply chain could struggle to replace lost revenue and service their debt," the BIS said.