Jim Grant: AI Is “One of the Greatest Bubbles of All Time” | #634

Jim Grant argues that today’s AI frenzy may be one of the greatest bubbles ever seen, dwarfing the excitement of the 1990s dot‑com boom. He points out that inflation‑adjusted capital flowing into AI startups, data‑center construction, and semiconductor manufacturing far exceeds the money that poured into early internet companies. The Federal Reserve’s intrusive stance, combined with speculative optimism, creates a risk of overbuilding—much like the late‑1990s surge of IPOs. Grant warns that demand for AI‑related tokens and infrastructure could be mis‑calculated, setting the stage for a sharp correction if supply outpaces genuine usage.

Grant draws a line from AI to 19th‑century railroads and the 1873 panic, illustrating how transformative technology can trigger price deflation and massive credit strain. The opening of the Suez Canal and the spread of telegraph cut transport costs, driving a two‑percent annual price decline for two decades. Yet that “creative destruction” lifted real wages and reshaped global trade. He stresses that deflation is rarely a benign price fall; historically it signals collapsing credit, as seen in the 1930s and during the 2008 financial crisis. Understanding these cycles helps investors gauge whether today’s AI hype mirrors past over‑expansions.

Today's investors face a paradox: ultra‑low rates that once fueled private‑equity leverage now clash with a Federal Reserve inching toward 4‑5% policy rates. The surge in junk‑bond and corporate‑bond yields reflects a desperate hunt for income, while insurers and pension funds chase spread income by loading up on speculative‑grade securities. Grant warns that this yield‑chasing behavior, combined with high‑leverage balance sheets, could amplify losses when rates rise further. For portfolio managers, the lesson is to balance exposure to AI‑centric assets with disciplined credit analysis, remembering that history repeatedly punishes unchecked optimism and thin margins.