Ever had a bad feeling about something?
We're in the middle of an enormous economic bubble.
And when it collapses, it's going to be very bad.
That everything could just fall apart.
Like every bubble, it's hard to know when you're in one until it's popped.
Surviving bubbles.
That's World Business Report from the BBC World Service.
Yes, I'm Ed Butler, and today we're going to be examining the growing fears that the boom in artificial intelligence could be an unsustainable bubble that's ready to burst and which could threaten all global growth.
We're hearing from the bestselling author and commentator, Andrew Ross Sorkin.
But before that...
What may be the biggest battle yet in Donald Trump's global trade war is about to begin.
The US Supreme Court is to consider on Wednesday whether the range of import duties that the White House imposed on all kinds of foreign nations this year from China to India to Eswatini are actually legal under US law.
Specifically, the case involves tariffs applied under the 1977 International Emergency Economic Powers Act, which the White House used to bypass Congress and other bureaucratic processes.
With me to consider the issues here and what's at stake politically as well as economically, is Gillian Tett, provost of King's College Cambridge, and a columnist for the Financial Times.
It's big, isn't it?
Both in economic terms, but also in political terms.
Gillian capturing, I guess what so many of the concerns that opponents have about the use of executive power in the Trump White House?
Absolutely.
Well, if the Trump administration was a television series, this would be a whole new plot twist and cliffhanger, because you know, investors around the world and governments and businesses around the world have already dealt with so many dramatic plot twists around tariffs in the last year.
And here comes another one, because if the Supreme Court rules that these tariffs were illegal, then there are things that the Trump administration can do to try and substitute the legal rulings that used last time round to get the tariffs in with new legal frameworks.
But that could take quite a few weeks and could cause another round of upheaval as businesses try to work out what on earth the tariffs are actually going to be.
Yeah, businesses and countries alike, I guess.
I mean, Trump's trade strategy includes those global tariffs introduced in April.
I mean it would have to refund, perhaps in the short term, some of the billions of dollars it's collected through the tariffs.
Well, technically speaking, if they do indeed rule that the tariffs are illegal, there could be lawsuits demanding refunds.
Now administratively, that would be absolutely nightmarish, because not only would you have businesses scrambling to work out what they should and shouldn't pay, the government agencies would then have to try and work out what should and shouldn't pay as well.
So it really would be incredibly complex, you know, under almost any measures you can imagine.
Sorry, one second Gillian, because I want to bring in somebody else who actually is in the heart of this story.
We will come back to you in a second.
The reason, of course, that the case is being heard.
It's down to a number of small businesses and groups of states who contend that these tariffs are problematic, unfairly burdening them.
And one of those business owners is Rick Waldenberg.
He's CEO of Learning Resources, a small Chicago toy company.
Hi, Rick.
Just explain for us, I guess, first what brought you to force this case into the law courts in the first place.
Well, thanks for having me.
When the tariffs were imposed originally the fentanyl tariffs in February and March, and then later his reciprocal and universal tariffs in the first week of April our cost for tariffs, which on average was 2 or less in 2024, went to 145.
And, you know, Mr. Trump had promised to have tariffs, quote, as high as 60%.
And he went to two and a half times that.
And these are tariffs on China, right?
Chinese imports.
And that was where your toys were being made.
Right.
But there was really no – there wasn't substantial relief elsewhere.
Remember, our tariffs were like under 2 percent in the year before.
So it was 30 percent and 50 percent and more in other places.
All of that was flowing through to our financial statements and it was, you know, devastating.
I heard that amazing story.
You were writing about one of your toys, the bubble plush yoga ball.
Buddy fuzzy exercise balls for small children.
This is the kind of stuff you have been importing for years, right?
And you were then having to find alternative places to make your toys other than China.
Yeah, it's a great story about the real-world impact of this.
We had developed this product which we were going to sell through Walmart, which we are going to sell through Walmart.
And when Walmart placed the order, we had planned to make it in China.
Then the tariff rates went through to the moon, so we had to scramble around and see if we could find anyone that could make this new product for us in some other place.
We landed on India, which at the time had a 10 tariff, and so we threw all of our efforts into quickly developing a product out of India that we could sell.
You know, deliver to Walmart.
By the time we managed to do that with brand new factories, we'd take several trips there and so on and so forth to get it working.
By the time we shipped in August, Mr Trump had gotten unhappy with India and their tariff rate went to 50.
As of midnight this on September 16th.
So our first two orders were shipped on a boat that was supposed to land before midnight but it came in after midnight by six hours and we ended up paying 50000 extra.
So 50000 for that, and then you know millions you were describing in overall costs across all your product range.
I mean, just tell me then, You're bringing this case.
I guess critics Republicans, will say you've been put up to it by I don't know political opponents of the president.
I mean, what does it mean to you whether or not this is a legal victory?
Well, first of all, I'd like to say the person that put me up to this was the Trump administration.
We didn't face this problem until they imposed these taxes.
I sued on behalf of myself and our company.
So That's not true.
What will it mean?
You know, this case has grown and grown in importance.
So it was originally and is principally about an unlawful tax, but it is not unrealistic to see it as a proxy, as a gut check on the rule of law and respect for separation of powers.
We believe it's unlawful because the Constitution says specifically that it is Congress who's responsible for legislation and the imposition of taxes.
The executive branch through the president can't do it.
And so the whole concept of how the American government functions and whether or not we can rely on these written rules that we can read is for ourselves is being tested in this case.
So it is quite an important referendum.
Rick Waldenberg, thank you very much.
Jill, Jillian Tett, I mean, a final thought here.
We've talked about whether he's successful, rather whether yes, Rick Waldenberg is successful, the challenge is successful.
I guess there'll be concerns both ways in terms of how this runs.
Absolutely.
And there's a very important factor that investors need to think about, apart from the businesses concerned, which is what this means for government finances in America.
Because one of the factors which has kept the bond market fairly calm this year is a belief that the Trump administration will get a lot of revenue from tariffs.
If that suddenly evaporates, you may see investors starting to get a, And that could actually end up delivering more market jolts than anything else is actually happening to the businesses.
And that is an issue because the markets are a little bit frenetic at the moment, aren't they?
I mean, in terms of how they're viewing the stability of the US economy.
Absolutely.
I mean.
What you've seen earlier this year, when the tariffs were first announced, were a number of investors are panicking and selling government bonds, which pushes up the price on of borrowing in the markets.
Now, since then, Scott Besant, the Treasury Secretary, has done a remarkably good job of keeping markets calm and lowering the yields and raising the price of bonds.
But that's predicated on him having three four, five hundred billion dollars a month of income from tariffs.
If that goes up in a puff of smoke, that will be yet another plot twist in this extraordinary saga of economic policymaking.
Gillian Tett.
Thank you very much indeed.
Gillian Tett, a columnist with the FT and a provost of King's College, Cambridge.
A warning, this could take days, possibly weeks.
We don't know how long it will take the Supreme Court to make a ruling, but watch this space.
You're with World Business Report from the BBC World Service.
Now, Fiona Sincotta is Senior Market Analyst at Citi Index.
She's with us.
We're away from the tariff case, because I guess we're going to have to sit and watch and wait for that one.
The Canadian budget has been revealed today.
This is the first, isn't it, in Mark Carney's government since his election.
What did we learn?
Yes, so as you pointed out, first one since he was elected.
And you know it's basically we're seeing, you know, some big ticket spending in order to prop up an economy which has really been, you know, grappling with economic issues, particularly with regards to trade with the US, but also, you know, cuts to public services.
So you know, this is an economy that has been struggling and that Carney really had big plans for as far as kick-starting the economy in order to make it.
I think his plans were to make it the the strongest economy in the G7.
So what we're looking at here is, you know, big spending.
So we've got around 141 billion in new spending over the next five years, but that will be partially offset by some 512 billion in cuts and other savings.
The Canadian dollar hasn't actually moved too much on the back of it.
We have actually seen a weakening of the Canadian dollar recently just against the US dollar, but that's more of a US dollar strength story.
Elsewhere, Palantir's share price has dropped.
This is a fascinating story.
It's dropped, what, nearly 10 percent?
I don't know where we're at now.
This is after Michael Burry, famous for his role in the big short story.
This is the story around what happened in 2008 in the run up to the global financial crisis.
So he said, hasn't he, that he's betting against Palantir.
And this has caused.
This itself has caused shares in Palantir to drop by such a massive amount.
Wow, do you know what i mean?
Palantir had had a phenomenal run-up so far.
It was up around 400 over a year, so you know, 30 in the last three months.
It's almost as if it was sort of you know the uh, the stock, that sort of uh reflects ai optimism in in some sort of bubble-like way and obviously there are lots of concerns.
You know we've seen lots of deals around ai.
We've had lots of questions about has this run high, gone too much?
And it's just raised those questions about is this a bubble?
And I think just the timing of Michael stepping in and placing that short has just fed on market nerves which has sort of resulted in this sell-off that we've seen.
Yeah, I mean, you mentioned market nerves.
Wall Street's main indices generally declined after the CEOs of two big US banks have warned, haven't they, of a market sell-off generally over the next couple of years.
Yes.
And I think you know it's not surprising that we've heard those warnings, because we have seen a a phenomenal rally, you know, a really phenomenal rally in the SP 500 in the NASDAQ.
And stocks don't just go up.
That's what they seem to be doing recently.
So it would be healthy to have a pullback.
It's not.
You know.
We've had the Federal Reserve Chair, Jerome Powell, also warn of sort of over lofty valuations as well.
So it's not unheard of at the moment.
Fiona Sincotta, thanks very much indeed.
Well, speaking of drops corrections, America's tech giants Google Amazon, Microsoft and Meta have collectively been investing hundreds of billions of dollars of late into artificial intelligence specifically, of course, into new data centres, which are needed to power what they're calling this fourth industrial revolution in AI.
The boom has been responsible for most of America's GDP growth over this year, as well as its market growth.
But can it really last forever?
As we've been hearing, there are concerns.
In the last few weeks, more and more of the world's leading figures in finance have raised their doubts.
And I've been hearing the arguments from some of those who are concerned.
I am far more worried about that than others.
I'm not saying next year.
It could be six months, could be two years.
So I say the level of uncertainty should be higher in most people's minds than what I call normal.
Jamie Dimon, head of JPMorgan Chase, considered by many to be the most important banker in the world.
History tells us this sentiment can turn on the dime.
If a sharp correction were to occur, tighter financial conditions could drag down world growth, expose vulnerabilities and make life especially tough for developing countries.
And that's Kristalina Georgieva, head of the IMF, one of the biggest figures in international finance.
Even leading Silicon Valley investors like Jerry Kaplan are now weighing in.
We're in the middle of an enormous economic bubble.
What we're seeing is this process of this thing feeding on itself, and when it collapses, it's going to be very bad.
Shares of the internet appliance provider got hammered today, losing over 10 points after Bear Stearns issued some cautious comments on the stock.
Some of the new economy dot coms are sinking as fast as the level of the tide on the Thames.
As everyone in Silicon Valley remembers, we have been here before.
This was March 2000, when many of the first generation of heavily backed internet firms were swamped in an avalanche of red as investors lost faith.
Five trillion dollars were wiped off the US tech index over two years as shares crumbled.
Professor of Finance John Danielson at the London School of Economics has made a career out of studying economic bubbles.
He says that new technologies have a way of attracting too much hype, and investment.
What happens is we all get sort of swept up in the bubble.
Prices go up, we buy and we get wealthier, and that makes us feel smart and makes us feel rich.
It validates our beliefs about ourselves.
Every time when we have some fantastic new technology, we know that some companies will end up becoming fabulously rich.
Some companies will end up owning this space, if you will.
And of course, that means...
A lot of people want to be a part of that.
So we are trying to spot the winner, but of course most of us make a big mistake.
With the AI bubble, somebody will end up dominating this in the years and decades down the road.
Will it be the current companies?
I sort of doubt that.
While artificial intelligence technology offers world-changing promise, critics say the actual economic returns are still unproven.
Already eye-watering sums.
Hundreds of billions of dollars have been committed to new projects like this data centre in Louisiana.
Total AI investment could reach $5 trillion by 2030.
But for now it's estimated that 95 of companies currently trying to deploy AI are not actually seeing any profit from it.
Of course, not everyone's a pessimist.
Look, I mean, I've covered tech stocks since the 90s, and this is not a bubble.
This is a spending cycle unlike we've ever seen.
The investor and AI enthusiast, Dan Ives, who scorns the naysayers, the bears, as he calls them.
And look, the bears, they're always going to yell fire in a crowd theater saying it's a bubble.
They've missed every tech name the last 20 years saying the same thing.
But I think this is actually the start of a fourth industrial revolution, not a bubble, which is why we believe this is a bull market for the next two to three years, as these use cases play out and the AI revolution marches on.
Whichever side you're on in this debate, the problem is partly the complex nature of the financing of some of the new investments.
Tech giants are pumping billions into each other right now to support the sector's growth, and that makes it hard to identify what, if anything, is genuinely profitable.
The confusion is neatly summarised by the BBC's North America technology correspondent, Lily Jamali.
Like every bubble, it's hard to know when you're in one until it's popped.
I think that's why there's so much trepidation around Silicon Valley right now.
Lily Jamali, and you can hear more on all of that in today's edition of Business Daily.
Wherever you get your podcasts.
Well, among those who have been studying bubbles of the past is the celebrated TV journalist and author, Andrew Ross Sorkin.
He's just written a new book 1929, a history of the build-up and aftermath of the famous Wall Street crash that led to the Great Depression of the 1930s.
In a wide-ranging interview he explained to me why he saw uncanny parallels between the Wall Street crash of the 20s and the AI boom today.
Well look.
The truth is that when I began this project eight years ago, I did not imagine the parallels.
I was just trying to write a book about both about history that brought you in the room in almost cinematic ways so you could be with these fabulous characters and understand what happened then.
And as I was writing, the parallels became almost like sirens.
There was a remarkable amount of euphoria in the 1920s.
There was remarkable new technologies that really we live with today automobiles telecommunications, radio.
I mean, RCA was the NVIDIA of its time.
People were enamored with it.
And everybody in the United States and frankly, increasingly around the world at that point started trading in these stocks.
And it was all powered by leverage debt.
Banks were lending people enormous amounts of money to buy the stock.
You could go into a brokerage house anywhere.
I mean, they were on corners every which way, in a hotel.
And you'd put down a dollar or a pound, and they'd give you 10 to go trade with.
And when you start to just think about what that – sort of euphoric period looked like.
And you compare it to the euphoria right now around AI, this amazing technology that people think is life changing.
And it probably is.
And we will probably be living with it just the way we live with radio.
But that doesn't mean that the economics of it always makes sense in the moment and that there can't be a hiccup or much, much worse than that.
The mistakes of 1929 won't happen again exactly as they happened then, will they?
I think it's unlikely that we will have another crash like 1929 that leads to a Great Depression, because it was really the combination of the crash itself and then a number of dominoes that fell from there.
And as you mentioned, you know, there were no rules then.
There were no bank capital requirements or anything else.
And those things do exist today.
So I'd like to think that maybe we're closer to 1999 than we are to 1929 in terms of what a massive correction could look like.
The one big difference though that didn't exist in 1929 was the amount of government debt that was layered on top of everything else.
So back in 1929, for example, in the United States, there was a budget surplus, if you can believe that.
Of course, that's not the case today.
And if the lesson of every financial crisis is actually that you have to throw money at the problem, that effectively you have to bail out everybody, It could be that we force a sort of mass bailout of the system, but that ultimately we create an even bigger problem because of the government debt that lays underneath it all.
Right.
And we're vulnerable because we had 2008, the global financial crisis which, of course, caused tons of money to be thrown at the problem.
And then we had the pandemic more recently with tons of government money thrown at that.
And so perhaps governments and central banks don't have the liquidity they had previously to manage a new crisis, if and when it occurs.
I think that's the big question.
And then the other question, which is different than 2008 and even before then, is I'm not sure we know where all of this debt and leverage in the system really lies anymore.
It used to be that you could look at a most loans because of actually how much we regulated banks.
After the 2008 crisis, across the world moved into what's called private credit funds, effectively shadow banking.
And so we have no real sense of what those loans look like and frankly, how interconnected they may very well be.
Interconnection is an interesting one, because when people talk about the AI bubble now, they talk about slightly opaque forms of sort of circular investment that's going on between the various institutions.
Why is that a concern?
Well, I think what you're referring to is, for example, there was a transaction where OpenAI, which of course runs ChatGPT, makes a deal to commit to buy billions and billions of dollars worth of NVIDIA chips.
But of course, OpenAI is not profitable yet.
So how are they financing it?
Well, NVIDIA effectively is giving them the money by buying a stake in OpenAI itself.
And so it looks very much like what they call a round trip or circular transaction.
And that's really a red flag in terms of just how the economics of this could work or not work if you have companies that don't produce cash making commitments to pay for things that require cash.
So here's the missing piece.
In this whole investment, the hundreds of billions of dollars that are going into data centers right now.
So much of those investments are not strictly coming from the big tech companies themselves.
There are real estate companies engaged in this.
There are energy companies that have to power these data centers.
There's construction companies involved in all of this.
There's electricians.
I mean you could go down the line and the leverage in that ecosystem.
The amount of debt that people are taking on to effectively invest in this ecosystem is real.
And I don't think we know fully how real it is.
And this idea about the connection to the banks is still an open question.
And so if everybody rushes for the exit at once, it'll be a great experiment to see what ultimately happens.
The trouble with bubbles, isn't it, is that we never quite know.
Or perhaps we can never really completely know when we're in one, just because every crisis or situation seems predictable.
The same, but also just a little bit different from the last.
The lessons of the past are not always entirely learnable, are they?
They're not always entirely learnable.
And in fact I have a quote at the very beginning of this book from Albert Einstein, of all people, quoted on October 26th 1929, when he talks about this idea that we can never really learn the lessons of the past except to learn them ourselves.
And I thought it was a very poignant quote.
We all do like to believe that this time is different.
If we are in a bubble and if we all knew hypothetically that we were in one or approaching one, what is the sensible response?
Well, that's the great question, because you can go back in time.
And you know, in 1928, Charles Merrill, who was the founder of Merrill Lynch, told people to get out of the market.
And in retrospect today you might say that was a brilliant choice.
But it really wasn't, because between the beginning of 1928 and September of 1929 the stock market went up 90.
So you can be the Cassandra, but the truth is that over time assuming you can afford to wait out a down period it has always been much more profitable to be a professional optimist than a professional skeptic.
Which means you can't ever legislate for fools, I suppose or at least gamblers one of the great challenges of our time.
Words of warning from Andrew Ross Sorkin, author of a new book 1929 the inside story of the greatest crash in Wall Street history.
Not so great for those who were in it, I imagine.
That's it for today's edition of World Business Report.
From me, Ed Butler, and everyone here in Salford, thanks very much for listening.
Take care.
