This Is How the AI Bubble Will Pop Author: Derek Thompson Date: October 2, 2025 --- Overview The AI infrastructure boom is shaping the 21st century economy but the underlying numbers signal a likely bubble. Massive investments are being made with uncertain economic returns, reminiscent of historic boom-bust cycles in railroads and the dot-com era. While AI promises to transform the world, the current surge in spending resembles speculative excess that often precedes a crash. --- Key Points AI Spending Magnitude Tech companies are projected to spend about $400 billion in 2025 on AI infrastructure. This level of investment surpasses historic projects like the Apollo space program ($300 billion adjusted). The AI buildout requires an "Apollo program" scale investment every 10 months, driving enormous capital deployment. Economic Disparity Despite massive infrastructure spending, consumer expenditure on AI services remains around $12 billion annually (comparable to Somalia's GDP). In contrast, projected AI capital expenditures in the U.S. will exceed $500 billion in 2026 and 2027 (roughly Singapore's GDP). Growing reports suggest AI usage may be declining at large companies struggling to find cost-saving use cases. Signs of a Bubble Startups like Thinking Machines raised $2 billion in seed funding at a $10 billion valuation without releasing products or clear plans. Stock market momentum is driving AI company valuations, detached from fundamentals, fueled by retail investor trends. AI hyperscalers are allegedly using accounting tricks and off-balance-sheet arrangements (SPVs) to hide true infrastructure costs and inflate profits. --- Interview Highlights: Paul Kedrosky (Investor and Author) AI Infrastructure Build-out Data-center spending has become a major GDP growth driver, especially in Northern Virginia, with GPUs representing ~60% of data center costs. Remaining costs are cooling, energy, construction, and real estate. Economic Impact Similar to the 1990s telecom boom that starved U.S. manufacturing of capital, AI spending is diverting large investment away from other sectors. Small manufacturers face higher hurdle rates and difficulty raising capital as investors prefer "giant checks" in AI infrastructure over numerous small manufacturing investments. This dynamic perpetuates economic imbalance even as tariffs and onshoring measures attempt to revive domestic manufacturing. Energy and Local Impact Data centers consume massive amounts of electricity, raising energy prices and causing local resistance (NIMBYism). A shift towards offshore data centers (India, Middle East) is expected to mitigate energy-political challenges. --- Prediction for How the AI Bubble Will Burst The bubble will likely pop due to a mismatch between capital spending and real returns, overvaluation, and financial opacity. Signs include declining AI usage despite high investment and novel financial engineering obscuring true costs. Certain industries and investors may face major disruptions as the bubble bursts. Semiconductor companies like Nvidia hold pivotal roles in the financial ecosystem underpinning AI investment. --- Additional Information The author conducted a podcast interview with Paul Kedrosky, offering deep insights into AI capital expenditures, economic effects, and potential bubble dynamics. Charts from JP Morgan illustrate the rising contribution of tech capex to GDP growth. Readers can access a transcript and further analysis through a subscription. --- Conclusion The AI boom represents a vast infrastructure investment with transformative potential but accompanies a speculative bubble with signs paralleling historic economic manias. Understanding this helps anticipate economic shifts and prepare for the eventual correction. --- *Images referenced include close-up photos of bubbles