Are we on the brink of the next financial crisis? Last Thursday, there was a “bloodbath in tech stocks,” as the stock market lost $3.2 trillion in a single day. The media is blaming the “blue wave,” but anxiety about the AI boom was already rising before the election. The week prior, on October 29, the “Magnificent Seven”—the tech companies that have driven much of the stock market’s recent growth—lost nearly a trillion dollars in value. The immediate catalyst for that sell-off was the realization that Google, Amazon, and Meta have all become “cash incinerators,” as their latest earnings reports showed astronomical spending on AI and a growing reliance on borrowing. The question that skeptics have long raised about the data center buildout has suddenly reached a fever pitch: will there actually be enough demand for AI for the companies to cover these massive investments and pay back their loans?
What has yet to enter public consciousness, however, is the extent to which working people’s financial assets have been used to fuel this bubble. Individuals protesting data centers often have no idea that their retirement accounts are being used to finance the companies responsible for these projects. Nor are they aware that they are at risk of being left holding the bag.
As “private” credit and equity funds have become a new center of gravity in financial markets, our public pension fund systems have increasingly allocated the retirement savings of public sector workers to these opaque, unregulated institutions. Similarly, thanks to recent efforts by the Trump administration, the $15 trillion held in private sector workers’ retirement accounts is now, for the first time in history, available to be invested in private funds. And it is to these funds that the companies building out data centers (and the gas plants necessary to power them) have turned for financing. According to a new report from Americans for Financial Reform, for instance, private equity firms are behind 25-30% of data center financing. By putting our retirement chips in their basket, we are bound up in the risks that these companies are taking in the AI boom—even though they do not have to disclose those risks to us.
What are those risks? While the AI bubble is not, thankfully, built on an edifice of predatory mortgages, the complexity and scale of the loans made to data center operators and Big Tech is giving many people painful flashbacks to 2008. As the credit ratings agency S&P stated plainly in September, “the credit quality of hyperscalers is weakening,” due to the projected $7 trillion in spending by 2030, much of which has to be financed by debt. That deterioration is already appearing in credit markets. Sales of the infamous credit default swaps (CDS) are quickly increasing: more than $9 billion of CDS linked to Big Tech bonds was traded weekly in September, and they’re getting more expensive as there is more demand for the protection they offer. All of the financial transactions involved in building data centers are also increasingly correlated due to the dense web of financing and customer relationships in the sector, as well as the complexity of financing relationships in many data center projects. As S&P states, “if demand disappoints, chip values fall, or data center utilization declines, do the losses sit with the operator, the sponsor or the guarantor?”
These risks are complicated by last week’s election. Voters overwhelmingly rejected the construction of data centers—electing governors in Texas, Georgia, and New Mexico who have committed to some form of data center slowdown or moratorium, while approving nearly every ballot measure that called for data center moratoria or slowdowns. According to Axios, Texas was projected to account for nearly half of the data center buildout in 2028. Gina Hinojosa’s victory over Greg Abbott just changed the whole trajectory of the industry. Elon Musk, as the results came in, observed that “data centers in space looking pretty appealing right now.” This is an excellent outcome—not least because it may prompt some companies to revise their projected data center buildout—yet it does not wipe away the mountain of debt that has already accumulated, nor the risk that these debts will become unpayable.
The risk of financial collapse is not, at the end of the day, the most damaging part of the AI buildout. Yet it is the aspect over which pension fund trustees and people saving for retirement have the most control—we can demand that our pensions refrain from holding risky, unregulated financial assets linked to the data center boom, as some public pension fund trustees have started to do. Employees can demand that their employer find an asset manager that will not move their funds into unregulated financial assets. Note, however, that this will require more than shifting our portfolios “back” towards holding index funds that buy the tech-heavy stock market. As SpaceX becomes part of the S&P 500, and Anthropic and OpenAI become publicly traded, the stock markets will only get more AI-pilled.
In the longer term, with enough political will, we can redirect our retirement savings towards productive investment, such as building out affordable housing and funding the renewable energy transition. For example, NYC Comptroller Mark Levine announced a $4 billion affordable housing initiative in April. Pension fund trustees could follow his lead rather than direct money towards Blackstone, one of the country’s largest landlords and a major fund manager for public pensions. More ambitiously, as I’ve written elsewhere, the government should establish public asset managers and a public credit fund to change the structure of how public pension funds are deployed. We do not need to act as if pension funds and retirement accounts are being directed into the AI bubble by the invisible hand of the market: portfolio allocation choices are, in the context of this complicated disaster, some of the easiest places to apply pressure.
Recently, Michael Burry, the hedge fund manager made famous by Michael Lewis’ The Big Short, said “all the capital being spent and lent by the richest companies on Earth won’t be enough to keep the bubble from eventually bursting.” One of the most galling claims after the Great Financial Crisis was that no one could have seen it coming. This time, at least, it is staring us right in the face.
