U.S. Fed: "Assets Overvalued Amid AI Boom"... Warns of $3 Trillion Infrastructure Debt Bomb

"87% of market participants: AI is a financial risk"
Concerns over potential bad debt from Big Tech's "circular financing"

The U.S. Federal Reserve (Fed) identified asset valuation distortions caused by overheated investment in artificial intelligence (AI) and a sharp rise in astronomical infrastructure debt as potential flashpoints for financial markets.

New York Stock Exchange (NYSE) trader. Reuters-Yonhap News

On November 14 local time, the Fed said in its semiannual Financial Stability Report, released the previous day, that "pressure on asset valuations remains high" and that "equity valuation measures are elevated, partly reflecting market enthusiasm for 'superintelligence (SI).'" Superintelligence (SI) is a term used in the Trump Administration in place of AI.

In a survey of financial-sector professionals conducted by the Fed in September and October, 87% of respondents identified AI as a key risk to the financial sector. That was a 37-percentage-point jump from 50% in the survey conducted in May. Respondents expressed concern about a major stock-market correction resulting from deteriorating profitability, cyberattacks, and complex derivatives trading structures. A correction in risky asset prices (52%) and rising long-term interest rates (48%) were also cited as major sources of concern.

Debt-fueled investment to expand data centers and high-performance computing facilities has also reached a dangerous level. As of October this year, debt issuance in the advanced computing sector had topped $680 billion (approximately KRW 911.2 trillion), about five times the full-year total for 2023. The potential total, including debt, payment guarantees, and lease commitments not yet commenced, is expected to exceed $3 trillion (approximately KRW 4,020 trillion). The Fed forecast that the current pace of capital investment would soon surpass the late-1990s boom in broadband network investment.

"Circular financing," in which major technology companies act as a source of funding for data center operators through long-term leases and payment guarantees, also came under scrutiny. Analysts say that, because of the web of intertwined contracts between companies, the actual risk exposure of big tech companies far exceeds their on-balance-sheet debt.

The Fed warned that "if returns fail to keep pace with massive capital investment, asset fire sales and a credit crunch could occur together, weighing on the real economy." It added that "excessive borrowing by large hedge funds, which has reached its highest level since data collection began in 2013, could amplify the shock during a future economic downturn."

This content was produced with the assistance of AI translation services.