Austrian-school analysis argues the AI boom is a classic bubble created by expansionary monetary policy that artificially lowered interest rates and diverted savings from genuine production into projects that would not otherwise have been viable.

The size of the real “subsistence fund” of savings and capital—not impressive technology—determines affordability; chronic government spending, loose money and tariffs have already strained that fund.

The sharp slowdown in money-supply growth since early 2021 is expected to starve these misallocated activities of resources, and further rate cuts would only deepen the eventual bust.

According to some commentators, economic bubbles emerge because of inadequate demand and expanded capacity. Many believe that it is the exact opposite with AI—the expanded capacity is not enough to keep up with the demand. Hence, according to this logic, AI is not a bubble.

There is a tendency among many commentators to associate an economic boom with a healthy and growing economy. On the other hand, an economic bust is associated with economic weakness. Many commentators regard AI as a factor that will significantly strengthen the wealth-generation process. As a result, the chances for an economic bust appear to be very low.

Contrary to this way of thinking, an economic boom is not always genuine growth but often about the transfer of resources via expansionary monetary policies. This transfer is from wealth-generators towards activities that emerged due to expansionary monetary policies.

Once the central bank reverses its expansionary stance, the transfer of resources towards bubble activities that emerged because of easy money, inflation, and credit expansion slows or stops. This causes an economic bust. Hence, various activities that emerged due to credit expansion, including AI, will be starved of resources once the expansion slows or stops. 

An expansionary monetary policy, through the lowering of interest rates via artificial increases in money supply, diverts resources to various projects that would not have otherwise emerged, at least not at the time and amounts they did. For instance, many projects, possibly even new AI ventures, that would not not have been considered economically profitable prior to the lowering of the interest rates through credit expansion now seem viable. Due to the artificial lowering of the interest rate, these projects now seem economically viable.

Prior to the lowering of the interest rates, the calculation of the net present value of various projects would have shown a negative figure. However, once credit expansion causes a decrease in........

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