If AI and cryptocurrencies are not bubbles, we could be in big trouble.
What if the trillions of dollars placed on these bets turn out to be good investments? The disruption will be epic and terrible.
Many speculative manias are just fun for a while and then eventually lose their shirts, without doing much damage, like the tulips in 1635, and the comic book and silver bubbles in the late 1980s.
Sometimes the losses are so great that banks go bankrupt as well, which leads to a freeze in the financial system, recession and unemployment, as happened in 1929 and 2008.
Sometimes the thing being speculated is real and worthwhile, but people get carried away and pay too much for it.
Early investors lose their shirts, but later investors shed them, like the dot-com bubble of the 1990s.
What we haven’t seen as much is a speculative mania where early investors win because there is no depression.
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AI companies are gaining significant value
What if the digital double bubble of the mid-2020s – artificial intelligence and cryptocurrencies – had gone down in history as the first big bubble?
Between $3 trillion and $6 trillion has been invested in building AI infrastructure and software, and it has been responsible for almost all of the economic growth in the United States over the past year.
The 10 largest US AI companies have provided most of the US stock market’s gains over the past two years, and are now valued at $35 trillion, nearly half of the total market.
Meanwhile, there are 20,000 cryptocurrencies worth $5.8 trillion, of which Bitcoin accounts for more than half.
The total amount of cash in AI and cryptocurrency bets is more than a quarter of global GDP; Possibly the greatest technology investment boom/bubble in history.
If it collapses, as many expect, it will be a bad thing, and perhaps very bad if it does not stop soon; But if it doesn’t collapse at all, it could be disastrous.
AI will justify investment in it by replacing and augmenting human workers, as well as through subscriptions and advertising.
ChatGPT and other tools are certainly useful tools, but when they’re used to create fake videos designed to trick us into voting for a scammer, fake nude videos of an unsuspecting colleague, or provide answers to an exam, it’s no good.
And this is without the possibility that some AI experts worry about AI becoming self-aware and self-sustaining, and deciding to eliminate human infection on Earth.
More mundanely and urgently, since the launch of ChatGPT in 2022, the share of online articles written by AI, rather than humans, has declined. The percentage rose from less than 10 percent to 52 percent – That is, their number now exceeds what was written by man and is still rising… to what, 100 percent?
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Businesses will continue to lay people off
Estimates of permanent unemployment caused by AI range from 10 to 50 percent.
Let’s start with a comforting thought: it won’t be zero.
Companies are already laying off employees because of AI, and they are being rewarded by the stock market for doing so, which means they will continue to do so.
The weavers who lost their jobs when mechanical looms took over the Industrial Revolution were not the ones working in factories.
Clerks, drivers and call center employees who lost their jobs this time will not get jobs as computer operators or software programmers.
Economic historians call the period between 1790 and 1840 the “Engels Pause,” after Friedrich Engels, the German philosopher who worked with Karl Marx.
It describes a period in which British working-class wages stagnated and unemployment rates rose, while per capita GDP expanded rapidly due to technology. The “pause” took 50 years.
In some respects, 50% unemployment may actually be better than the more predictable 10% to 15%, because in that case there will be no doubt that a complete rethink of taxation, welfare, and society in general, will be required, including universal income financed by AI profits.
But is the unemployment rate at 10 to 15 percent? This happens fairly often and is called stagnation.
Except in this case, it would not be a recession, quite the opposite – there would be a productivity-driven GDP boom like an Engels pause, so the usual anti-unemployment tools of monetary and fiscal policy (interest rates and government spending) would not be available because they might cause inflation.
But this may not be enough unemployment to force them to reconsider social economics; rather, it may be enough to cause a life of misery for a few people while the rich become richer.
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It will not be possible to turn off artificial intelligence
Last week, I quoted HostPlus super’s chief investment officer, Sam Cecilia, on fusion energy, but we also discussed artificial intelligence, which his fund also invests in, like every other fund in the world. He’s worried about that.
“If you have 15 percent of your population permanently unemployed because AI is replacing low-level and entry-level jobs, those jobs will be lost forever, and we will never return to the previous world,” he told me.
“If it happens in multiple industries at once, how can society deal with that? The simple harsh answer might be: turn off the AI, but show me how it’s possible.”
No, turning off AI won’t be possible, there are about 40 trillion reasons (so far) not to do so.
Their regulation is focused on counterfeiting and cheating, which is fair enough, but improving one’s productivity through the simple method of replacing people with non-people (machines)? Go for it!
In fact, there is a global race for artificial intelligence, including by governments.
Blockchain was created to replace trust with cryptographic proof. (Getty Images: Paul Young/Bloomberg)
Meanwhile in encryption
As for cryptocurrencies, Bitcoin, Ethereum, Cardano, and most of the other 19,255 cryptocurrencies that have been conjured into existence have a valid purpose of providing a platform for people to transact directly with each other, peer-to-peer, rather than through expensive institutions.
The original white paper published by Bitcoin’s inventor, Satoshi Nakamoto, in 2008 began with the following: “Online commerce has come to rely almost exclusively on financial institutions acting as trusted third parties to process electronic payments. While the system works well enough for most transactions, it still suffers from weaknesses inherent in the trust-based model.”
He invented blockchain technology to replace trust with cryptographic proof, so that two parties can transact confidently with each other without the need for an intermediary – a bank. Thus Bitcoin was born.
But then Bitcoin and other blockchain specters have become speculative sports, and as with artificial intelligence, if they end up being worth the money bet on them, it could be terrible.
First of all, the brokers designed to replace them employ a lot of people, but more importantly, the anonymity of cryptocurrencies is ideal for fraud and money laundering.
For example, the Trump family is using two cryptocurrencies — Trump Coin and World Liberty Financial — in some brazen presidential shenanigans.
Last week The Australian Financial Review magazine reported Australians feed $275 million a year into cryptocurrency ATMs, of which there are 1,800 across the country. An 83-year-old woman, referred to as Mary in the piece, was robbed of $364,000 that she had fed, note by note, into the machine.
Police and prosecutors call cryptocurrency ATMs “getaway cars” for scammers.
One way to hold off AI and cryptocurrencies for a while until the authorities can catch up is for bubbles to burst and early investors to lose their shirts.
This is a strong chance of this happening, but what if they are not bubbles and there is no depression because they turn directly into good investments?
He can hardly bear to think.
Alan Koehler is a finance presenter and columnist for ABC News and also writes for Intelligent Investor.
