BIS Warns That AI Debt Could Turn Boom to Bust

Excessive artificial intelligence (AI) investment could make the technology’s boom unsustainable, according to a new Bank for International Settlements report.

“The AI build-out ranks among the largest technology-driven investment booms in U.S. history,” Phurichai Rungcharoenkitkul, an economist for the bank (BIS), wrote in a report published Tuesday (July 14). “Its scale, reliance on debt and circular equity ties raise questions about the boom’s sustainability and financial stability.”

Rungcharoenkitkul added that the study examined a “dynamic contest” in which companies vying for a “few dominant positions” over-commit resources, leaving the industry exposed to “revenue disappointment” that could transform the AI boom into bust.

“The larger the boom, the deeper the eventual bust. The race to commit early through debt and circular financing also makes a bust more likely,” the study said.

The report likened the boom in AI investments to other periods of heavy spending, such as the “canal mania” in the U.S. during the 1830s, a similar drive to build railroads in England a decade later, and the 1990s dotcom boom.

All of those booms “ended in sharp corrections” that had far-reaching economic implications, with the scale and speed of AI investment indicating the impact this time could be larger.

“The potential demand for AI services is clearly vast and could justify a substantial expansion in computational power,” Rungcharoenkitkul wrote. “Yet relative to its pre-boom trough, the current buildout is on track to outgrow every previous episode only three years in. To the extent that contest motives also shape investment decisions this time around, the tendency toward excessive commitment raises questions about the sustainability of the current boom.”

Meanwhile, a report last week from Bloomberg News said that the five companies spending the most on AI data centers in the U.S. had doubled their debt load in the past five years to fund their efforts.

In all, Alphabet, Amazon, Meta, Microsoft and Oracle added about $350 billion to their debt obligations, marking a change for the software industry, in which companies tend to bring in high margins without much routine capital spending.

PYMNTS reported in January that focus had moved from how much Big Tech was spending on AI to whether those investments were paying off in terms of durable growth and profitability.

“The sharp increase in capital expenditures this year, largely driven by investments in data centers, chips and AI infrastructure, intensified scrutiny of margins, cash flow and the pace at which AI-driven products can be monetized,” PYMNTS wrote.