What The Hell Is Going On With The Economy?

The fate of the Trump administration — and perhaps Republicans in Congress as well — is tied to American sentiment about the economy.

And right now, nobody knows what the hell is going on or which way is up.

According to The Wall Street Journal on Thursday night:

Stocks surrendered gains and closed sharply lower after a whirlwind day of trading that began after Nvidia posted strong results. The Nasdaq composite led indexes lower after being up on the day more than 2%. It closed 2.2% lower. Nvidia gave up an even bigger gain and finished the day down 3.2%.

Why did they end up down?

Because investors suspect there is, in fact, an AI bubble.

That suspicion is not unrealistic. Whenever there’s a transformative technology, people seem to think that just because there is a bubble, that means that the underlying technology is not transformative. If you look back at the history of investment, however, there is always a speculative bubble around brand-new technologies, and it tends to clean out failing companies.

You remember the successful companies. So you remember Henry Ford because Ford ended up being a wildly successful company. But there were dozens of other automobile companies that were startups at the time that ended up crapping out. In fact, Ford had several of them before he actually started the Ford Motor Company.

The same thing was true of the internet.

Everyone remembers that when the Internet bubble burst in 2000, Pets.com was seen as emblematic of the era. 

But what we should remember is that the internet has completely transformed everybody’s life. We all work on the internet. We all do commerce on the internet; we all interact on the internet.

The stock market bubble of 2000 did not mean the internet wasn’t important. There are idiots like Paul Krugman who tried to suggest that it wasn’t important. It was very important.

That’s also true with regard to AI. People are looking at the current AI boom, and they’re thinking that at some point here it has to crap out, that some of these companies are not going to be able to develop the kind of margins or gross income that justifies the investment they are currently making. OpenAI is the most obvious example of a company that is not publicly traded, but has so many contracts with publicly traded companies ranging from Oracle to Nvidia that if it craps out, it could take down a bunch of companies with it, or at least severely damage their market capitalization.

According to The New York Times:

It would not be a stretch to describe this period of hyperactive growth in the tech industry as a historic moment. Nvidia, which makes computer chips that are essential to building artificial intelligence, said on Wednesday that its quarterly profit had jumped to nearly $32 billion, up 65 percent from a year earlier and 245 percent from the year before that. Just three weeks ago, Nvidia became the first publicly traded company to be worth $5 trillion. 

That means Nvidia is now worth more, according to the stock market, than the entire economy of Germany. 

But some industry insiders say there is something ominous lurking behind all this bubble news. They look at the same eye-popping growth and the same stunning wealth creation from Mr. Huang and see a house of cards. And they say it is hard to know what the damage will be if it collapses.

Even Nvidia’s growth can be explained away because demand for the company’s chips doesn’t mean that people want to use AI; it means that companies are building giant AI systems in the hope that somebody will pay to use them eventually.

This is going to be the question: At some point, the productivity generation from AI is going to have to start matching up to the investments that are being made. People are betting on whether there’s going to be an AI boom that justifies all this or an AI bust. 

We don’t know which way it’s going, which is why people are freaking out.

They’re also freaking out because if it does succeed, there will be some temporary jobs dislocation. There are a lot of jobs that will become obsolete.

The history of job creation is that the economy becomes more productive. You get nicer things for cheaper prices. You work fewer hours; your grandparents worked many more hours than you do, for example.

But it also means that there is — with technological change —  significant job dislocation, people losing the kind of jobs they’ve historically held, and then having to find new jobs.

We’ve generated millions and millions of jobs in areas that we didn’t even know existed. This is just the way the economy tends to work.

That doesn’t mean that the angst and heartburn about job dislocation are false.

Thus, two things can be true at once: We can be in a transformative, amazing time for the economy, and the uncertainty and the concern can be real.

And it can’t all be alleviated by the government.