'Cold feet': Economist Paul Krugman says AI giants' borrowing binge will dry up and force them to abandon many data center projects

That’s no longer the case. “The size of the buildout is now so big that it is increasingly dependent upon massive levels of borrowing,” Krugman wrote. Indeed, four prominent hyperscalers — Alphabet, Amazon, Meta and Microsoft — borrowed $214 billion among them to continue powering the AI boom, according to The Economist. Last year, the four companies borrowed only $83 billion to lay the groundwork for data center construction, buying the chips and other equipment needed to stand up new AI infrastructure.

Krugman added that lenders are getting “cold feet” in issuing new loans to a speculative sector that risks not being able to justify its enormous spending with equally sized profits, particularly as AI models face competition from cheaper Chinese commercial rivals.

‘Wile E. Coyote moment’

Krugman argued that “fear is spreading” in loan markets, as investors snap up credit default swaps that protect them against deteriorating credit or a financial downturn in the sector. According to the Financial Times, Morgan Stanley research has noted that weekly trading in CDS markets for bonds issued by several AI giants like Oracle, SpaceX, Amazon, Alphabet, Nvidia, Broadcom and Meta amounted to more than $9 billion in September on average.

By comparison, trading volume totaled less than $2 billion per week in July. CDS were a popular insurance derivative in the run-up to the 2008 financial crisis.

“During the last few weeks, lenders to AI companies seem to be having a collective Wile E. Coyote moment — the point at which the animated character, having run off a cliff, looks down and only then, obeying the laws of cartoon physics, plunges to the ground,” Krugman wrote.

Krugman said CoreWeave, a Nvidia-supported compute seller, had a “high default risk.” The company ran into debt problems as its bond prices plummeted and its borrowing costs rose. The latter can be attributed in part to the Federal Reserve’s interest rate hike in September.

“Neither financing problems nor political opposition are likely, by themselves, to completely stop AI investment,” Krugman wrote. “But I predict they will greatly slow it down.”