The ruling class is increasingly gripped with panic over the prospect of an impending stock market crash. The former chief economist at the IMF has warned that the coming “correction” could sink the world economy into a major slump, evaporating as much as $35 trillion in one fell swoop.
Rallies on the market have allowed the richest 10%—who own 85% of all stocks—to increase their wealth as the market has hit one record after another. But the boom hides the rot in the real economy. The capitalists are now fearful that the speculative AI bonanza that has buoyed their wealth is coming to an end.
Mother of all bubbles
Gita Gopinath, deputy managing director at the IMF until September, estimates a crash “could wipe out over $20 trillion in wealth for American households, equivalent to roughly 70% of American GDP in 2024. This is several times larger than the losses incurred during the [dot-com] crash of the early 2000s.” That would eliminate more wealth than the total owned by the bottom 80% of US households.
Such a crisis would send shockwaves through the world economy. Foreign investors have pumped their idle cash into the mushrooming US market to get in on the action, inflating the bubble further. Because of the “scale of exposure,” she predicts they “could face wealth losses exceeding $15 trillion, or about 20% of the rest of the world’s GDP.”
Rallies around tech stocks made up 80% of the market’s gains this year. According to one Harvard economist, investment in tech accounted for a whopping 92% of GDP growth in the first half of the year. Without this, the US economy would have expanded by a paltry 0.1%. Such concentration of speculative capital—when 95% of AI companies building it haven’t turned a profit—is a clear sign of a bubble.
Tech firms driving the market have stock valuations dramatically exceeding their actual earnings. Just before the dot-com bubble popped in the early 2000s, the average stock price in the S&P 500 was 44 times higher than actual earnings. Today, the average stock is priced at 40 times earnings—higher than just before the 1929 crash. Nvidia is trading at 60 times its earnings, Tesla at 240 times, and Palantir at an astronomical 700 times.
Another flashing red light is the increase in “margin debt”—money borrowed solely for stock-market speculation. Such debt has grown by 32% between May and September to $1.3 trillion, just below the rate in the run up to the dot-com crash. If the market plummets, investors reliant on margin debt will scramble to pay it back—with interest—causing panic and a collapse in the credit market, tanking firms that rely on debt to remain afloat.
“Circular Financing”
Of course, tech giants and their financiers claim that comparisons to the dot-com bubble are unsound, pointing to the high levels of investment in tech infrastructure today. Companies are on track to spend $400 billion this year on AI, and the Financial Times estimates spending could top $7 trillion by 2030. While this investment is significant, with such a frail economy outside the AI “ecosystem”, where is consumer demand for their services going to come from? Pulling back the curtain reveals demand is largely created by so-called “circular financing.”
In essence, sellers are artificially generating demand by investing in their buyers, spinning a complex and opaque web of “cross-holdings” throughout the AI supply chain. Many large tech firms invest in “special-purpose vehicles” to disguise the cost of their AI buildout, removing it from their own balance sheets. Moreover, they’re increasingly partnering with private creditors and tapping “shadow banks” for less-regulated funding, making bourgeois analysts nervous.
Because OpenAI loses money each year, Nvidia has announced massive investments in OpenAI so the latter can buy Nvidia’s chips. Both firms invested in CoreWeave which will provide data center servers equipped with Nvidia’s chips to run OpenAI’s models. OpenAI has similar mutual investment deals with Microsoft and AMD.
Oracle’s share price jumped by 25% after committing hundreds of billions in deals with OpenAI. In order to finance this, one analyst noted, Oracle will have to take on “a sensational amount of debt.” Together, AI companies have amassed $1.2 trillion in debt.
Capitalism at a Dead-End
Behind the stock market mirage and the frenzied competition to build out AI infrastructure lies a capitalist system in terminal decline. Worldwide overproduction means more corporate cash flows into speculation, instead of production. Nearly a million fewer jobs were added this year than initially reported and layoffs hit a rate not seen since 2020. The housing market is in a slump as prices continue to rise despite weak demand. Delinquencies on credit cards and auto loans are climbing rapidly. The richest 10% make up 50% of all consumer spending. If their stock holdings nosedive, so too will their spending, sending the broader economy into recession—or worse.
The strategists of capital are awakening to the fact this crash will be more than an ephemeral “market correction.” The profit-driven logic of capitalism forces the capitalists to throw their money into the market despite the volatility. Though it’s impossible to predict which straw will break the camel’s back, it’s clear this carousel of speculation will eventually spin off its axis and crash. When it does, the ruling class will try to make the workers pay—leading to colossal explosions of class struggle.