If you think that right now, with all that’s happening in markets, there are no ongoing discussions behind closed doors of the US administration offices as to whether or not to publicly support the (reckless) AI hyperscalers, then I suggest it’s time to stop living under a rock and see the world for what it is.
The current administration had the chance to break the link between its policies and the performance of the stock market, and that looked like the path at the beginning of the year when a Trump advisor stated the stock market plunge was ‘No big deal’. Of course, it was a very big deal for Wall Street, which vehemently fought back against the administration (“Wall Street Bursts With Anger Over Tariff Stupidity”). What happened next is already history, and it takes us to the present day, when everyone expects the US administration to step in and deal with the growing investor concern over the bursting of a giant financial bubble nobody dares to deny anymore.
Clearly, the major cause of concern lies in the overvaluation of all stocks tied to the AI bubble, starting from Nvidia, which drove the vast majority of the stock market gains for quite some time. Back in January, in “THE REAL ERA OF AI BEGINS, THE ONE OF THE AI CHARLATANS ENDS“, I warned about how the direction taken by US companies towards putting all their efforts into overbuilding a massive data center infrastructure, while ignoring the importance of software and data quality in the development of AI, would ultimately yield very little if not negligible returns despite the biblical amount of money being invested and planned to be invested in such an effort. Back at that time, investors did not immediately dismiss the huge DeepSeek breakthrough in achieving what the likes of OpenAI did with a fraction of the cost, but it did not last long, and after the April stock market rout, the euphoria was back in charge.
Acknowledging that China’s approach to building AI was the right one would have thrown a wrench into the whole narrative that allowed the likes of Nvidia and OpenAI to achieve unimaginable valuations. As a consequence, everyone on the western side of the world spent an incredible amount of resources to hide the truth and convince the investor audience of the opposite. All I am describing was corroborated by the biggest revenue round-tripping scheme among mega-cap companies ever orchestrated. A scheme that is still being called by the milder term “circular financing” that nobody dares to deny anymore. The ultimate result of all this reckless behavior, which, let’s be honest, had the sole purpose of inflating public and private companies’ valuations as much as possible, was what I described in: “THE DATA CENTERS FRENZY WILL BE REMEMBERED AS THE LARGEST WASTE OF CAPITAL IN HISTORY“
Currently, the US government has almost $1 trillion of resources in the US TGA account. Do you think they will keep this money out of the market, watching the bubble collapse, or, like the Biden administration did twice, will they be willing to drain the US TGA account all the way down to zero in an ultimate effort to support the stock market and avoid the burst of the bubble as long as possible (ideally till US midterm elections)?
There are zero chances, mathematically speaking, that companies like OpenAI can fulfill $1.4 trillion of commitments to their suppliers, and its management has already made no mystery that they are lobbying hard to convince the US administration of how their future is a matter of “national security” for the US (“OpenAI discussed government loan guarantees for chip plants, not data centers, Altman says“). However, the US economy is facing a growing crisis that cannot be hidden anymore behind the stellar performance of the stock market. The housing affordability problem is now a prominent issue, along with rising unemployment, corporate bankruptcies, and delinquencies in the consumer loan, real estate, and auto loan debt sectors. This is the reason why the US administration hasn’t made a public move on AI yet, just limiting itself to external support of it (including closing an eye to all the accounting shenanigans these companies have been perpetrating). Politically speaking, spending public money to socialize losses of a sector that has already set itself on a path doomed to fail, that will require immense energy resources to run, and that will ultimately cause severe employment problems, won’t bode well with voters. The ultimate proof of how wrong US companies’ approach to building AI has been is demonstrated by 80% of the startups in the US currently using open source Chinese models to build their tech, not US ones (“China is quietly upstaging America with its open models“).
On the other side, though, the biblical buildup of data centers in the US has also been the major contributor, by far, of US GDP growth in the recent past, and letting it face the demise it would if left to the free market will also have repercussions on the US economy, broadly speaking (because, objectively, very few benefited from it): “The AI Data Center Boom Is Warping the US Economy“
The dilemma the US administration is currently facing—to bailout or not to bailout its prominent AI players—will have to be resolved sooner or later. In my opinion, the greater the market correction caused by the bubble deflating, the greater the pressure on the US administration to do something, especially when stock losses start significantly impacting retirement savings. But for sure, whatever they will be doing will only bring temporary relief, compounding the problems in the future caused by the never-ending misplacement of capital caused by public bailouts of companies that instead should be let fail, allowing the system to cleanse and to put itself back on a more stable and sustainable footing upon which it can resume sustainably growing in the long run.
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