THE SET-UP: To pop or not to pop … that is the question.
More to the point, that is the question preying on the minds of marketwatchers who fear the slings and arrows of economic reality will pop the outrageous fortune being amassed by the AI craze.
Today’s handwringing was kicked-off by an op-ed in The New York Times by Jared Bernstein and Ryan Cummings. You’ve likely seen Bernstein hold forth on the economy during the Biden Administration. He served as chair of Biden’s Council of Economic Advisers from 2023 to 2025. Cummings served on the Council as an economist from 2021 to 2023.
Together, the two “believe it’s time to call the third bubble of our century: the A.I. bubble.” The first bubbles were blown by a similar dynamic:
You may remember the recession that followed the collapse of dot-com stocks in 2001. Or, worse, the housing crisis of 2008. Both times, a new idea — the internet, mortgage-backed securities and the arcane derivatives they unleashed — convinced investors to plunge so much money into the stock market that it inflated two speculative bubbles whose inevitable bursting created much economic pain.
Speculation.
The economy has been driven by speculation since Ronald Reagan’s “revolution” toppled decades of Keynesian “Demand Side” economics and replaced it with Milton Friedman’s Supply Side creed. It shifted the balance of economic power … or, I should say, the balance sheet of economic power … in favor of investors over consumers (a.k.a. wage earners). Tax cuts and deregulation pooled money on the Supply Side of the national ledger and deregulation opened up a plethora of new opportunities to speculate.
By the time Morning In America dawned on us … penny stock speculators and corporate raiders were running amok. By the time a groggy America finished its first cup of coffee, the market was careening toward the Black Monday Crash of 1987. At the same time, another speculative bubble was already well into a second, fatal wave of Savings & Loan failures that would lead to a rush to withdraw funds that weren’t there. It was particularly rough on retirees who were drawn-in by unsustainable, profusely advertised interest rates for savings accounts and CDs.
The regulatory pull-back actually began under President Carter. At the time, he was looking for anything to alter the oppressive reality of stagflation. Under Reagan’s Friedmanite regime, though, the restrictor plates were removed and the S&L Scandal was off to the races. … in part because of the nefarious mismanagement of Silverado Savings & Loan. Neil Bush happened to be on the board and he was linked to shady deals with developers who were building like mad around the West. When those office parks tanked, Silverado’s house of cards collapsed. The whole industry would follow. The bailout would cost taxpayer upwards of $150 billion … circa 1990-2! At the time, Frontline called it the “worst financial disaster since the Great Depression.” Eventually, the Crash of 2008 would just laugh and say, “Hold my beer.”
In-between those two came the go-go Clinton years. That’s when market speculation was “democratized.” If I have one rule of thumb re: economics it’s “caveat emptor” whenever I hear Supply Siders sell a new financial scheme under the guise of “democratization.” During the dot-com mania, Wall Street and investing were being “democratized.” And even now the Trump Regime is “democratizing” access to private equity.
Ironically, the dot.com bubble was partially blown by democratized day traders and 401k obsessives who used technology to play the market even as they often got played by investing in (speculating on) the selfsame technology. A bevy of internet business-like ventures soaked up the cash being poured into those snazzy, new 401k pensions employers offered in lieu of the traditional ‘“defined benefit” pensions that allowed the Greatest and Silent generations to retire with a great deal of certainty.
For them, there was no impetus to speculate.
But since Reagan first entered the White House, it appears you cannot afford to NOT speculate. Oddly enough, I stumbled upon an excellent mediation on the post-Reagan economy by Seb Murray in “Insights” by the Stanford Business school. Published today, it examines the strange dichotomy of this economy:
The U.S. economy is in a perplexing place. The stock market is booming, yet overall growth is weak. In a new paper, James D. Paron, an assistant professor of finance at Stanford Graduate School of Business, argues these trends aren’t contradictions but two sides of the same coin.
As some of you know, I termed this phenomenon “escape velocity” … as in, the pool of capital hoarded by the Supply Side during the booms and busts of the last fifty years is now so massive, the billionaires on the Supply Side have escaped the economy’s gravity and now reside in orbit … safely above the day-today economy’s earthly pull and, I believe, they are now insulated from whatever fallout comes when this speculative bubble does what speculative bubbles do.
According to Paron’s research, the equities boom has less to do with innovation and more to do with wealth being concentrated in the hands of established corporate giants. As bigger, more efficient firms dominate the market, they have pushed up stock prices — even as the slowdown in new ideas drags on productivity and growth.
Innovation is technology’s primary sales pitch. So is productivity. But let’s not get ahead of ourselves.
The divergence between the stock market’s performance and the larger economy has widened over the past 50 years. U.S. gross domestic product growth has slowed while stock valuations have soared, far outpacing overall output. Paron shows that the stock market’s rise since the 1970s is not because individual companies became more valuable relative to their own sales. Instead, it is because the biggest, highest-valued firms grabbed a larger share of the market.
Neither Murray or Paron mentions Reagan’s economy-shifting policies. However, that was almost 50 years ago.
This trend is underpinned by a decline in innovation productivity, the amount of economic growth generated from each dollar spent on research and development. Paron finds the measure has plunged by about 47% since 1975. “When innovation gets harder, firms spend less on R&D, which is why growth falls,” he says.
The promise of game-changing “productivity” just-so-happens to be the main allure of artificial intelligence. And it’s no coincidence that most startups are launched with a buyout “exit” in mind…
Firms increasingly rely on mergers and acquisitions to drive their growth. Paron finds that M&A spending has doubled relative to R&D spending over the past 40 years, peaking in the late ’90s and staying relatively elevated since.
This speculative, financialized economy is a far cry from the productive manufacturing economy fostered by Demand Side economic policies.
In the meantime, fewer new companies are entering the market to compete with the incumbents. (And more of those that do enter the market are seeking to be acquired by their bigger competitors.) From 1980 to 2018, the annual rate of new company entries fell from 12% to 8%, while the sales share of dominant firms climbed from 15% to 30%.
Note the start of the decline in 1980. Reagan’s “Revolution” birthed the speculative, service-driven economy that has hollowed out the American Dream.
Paron’s study finds that living standards, as measured by the present value of consumption, including wages and the profits of new companies, stagnated between 1970 and 2020. Instead, the gains flowed to entrenched corporations at the expense of workers and companies that would exist if innovation were easier.
“For the typical consumer, there’s little to no gain — they are worse off, with weaker growth and fewer new ideas,” Paron says. “The real winners are the owners of the most productive big firms, who benefit disproportionately.”
Right now, those “big firms” are the “Mag-Seven” tech companies that dominate the S&P 500. Proinsias O’Mahony of The Irish Times explained their market dominating role in piece published yesterday:
The magnificent seven are back – or are they?
Well, kind of. After trailing the S&P 500 for much of 2025, the much-hyped mega-cap grouping has recently surged ahead, buoyed by strong gains for Tesla, Nvidia, Apple, and Microsoft, each up 10 to 25 per cent over the past month.
The “kind of” qualifier reflects that only four of the seven – Nvidia, Alphabet, Microsoft and Meta – have actually outperformed this year.
Still, the US remains “a tale of two markets”, notes Schwab’s Liz Ann Sonders. The S&P 500 and Nasdaq trade at all-time highs, but most stocks have lagged.
So, here we are once again with many a 401k riding a speculative wave fueled by tech stocks. Dot-coms have been replaced by an intoxicating cocktail of AI and FOMO. Ironically, it’s all to chase the promise of massive gains in productivity. As Eryk Salvaggio of Tech Policy Press explained yesterday, the early data on doesn’t quite match the hype:
Studies reveal some fissures in the case that AI boosts productivity. A recent survey by Bain Capital suggested that 95% of US companies were using generative AI, but the same survey found that 29% had seen unclear evidence of a return on that investment while 39% were held back by concerns over the quality of AI output. Another study found 42% of companies that had adopted AI efforts abandoned them. While it’s early, we begin to find a common thread: generative AI is used, but is not always useful.
Bain’s conclusions have been corroborated…
A recent study surveyed 25,000 workers and 7,000 workplaces in Denmark, where AI adoption is relatively high: 30% of the workforce received AI training. The study found that “AI chatbots have had no significant impact on earnings or recorded hours in any occupation.”
…and..
The Denmark study found a near-zero impact on wages even amongst those who adopted AI earliest, used it the most often, or claimed it had saved them the most time.
In fact, AI can cost time instead of saving it…
Consider the impact of inaccurate text output. With even state-of-the-art so-called “reasoning models” introducing errors on general questions 51% to 79% of the time, how does one compare time and productivity losses from bad information generation or summarization, known as hallucinations, with the speed with which that summary was crafted?
Perhaps it’s apropos that the fifth bubble is being blown by an almost manically-hyped “innovation” that promises to forever change productivity, but is prone to hallucinatory mistakes. It seems to me that a hallucinatory mistake is how this all started back in 1980. - jp
Is there an AI bubble? Financial institutions sound a warning
https://newsadvance.com/news/nation-world/business/economy/article_5e42b123-35a5-5e25-8a6a-4cb17d29808a.html
Are markets in an AI bubble? Why these 2 strategists disagree
https://finance.yahoo.com/video/markets-ai-bubble-why-2-110047332.html
Are We in an AI Bubble? Examining the Sky-High Valuations of OpenAI and Anthropic
https://opentools.ai/news/are-we-in-an-ai-bubble-examining-the-sky-high-valuations-of-openai-and-anthropic
BofA’s survey shows 54% of investors say AI in bubble, 60% say stocks overvalued By Investing.com
https://www.investing.com/news/stock-market-news/bofas-survey-shows-54-of-investors-say-ai-in-bubble-60-say-stocks-overvalued-4284842
Ex-Intel CEO Pat Gelsinger says ‘of course’ we’re in an AI bubble but it won’t end ‘for several years’
https://www.pcgamer.com/software/ai/ex-intel-ceo-pat-gelsinger-says-of-course-were-in-an-ai-bubble-but-it-wont-end-for-several-years/
If we’re in an AI bubble, why doesn’t it feel like we’re in an AI bubble?
https://www.businessinsider.com/ai-bubble-culture-dotcom-housing-crypto-different-vibes-2025-10
When will the AI bubble burst? As OpenAI signs yet another megabucks deal with Broadcom, can anyone make sense of the trillions of dollars involved?
https://www.pcgamer.com/software/ai/when-will-the-ai-bubble-burst-as-openai-signs-yet-another-megabucks-deal-with-broadcom-can-anyone-make-sense-of-the-trillions-of-dollars-involved/
‘AI can’t be just a bubble. Deep investments going into building infrastructure’: Google exec as company commits $15 billion to India data centre hub
https://indianexpress.com/article/technology/artificial-intelligence/google-exec-as-company-commits-15-billion-to-data-center-hub-in-india-10306532/
The AI boom looks a lot like the dot-com bubble, IMF warns
https://qz.com/ai-spending-dot-com-bubble-imf
The AI Bubble: A Dot-Com Analogy with Broader Implications
https://www.startuphub.ai/ai-news/ai-video/2025/the-ai-bubble-a-dot-com-analogy-with-broader-implications/