AI Is the new Dot-Com 🫧… but bigger

And we all know how that story ended

We just finished watching an outstanding piece from Dutch television on the global AI race and how it might play out, according to economist Andy Xie.

Xie worked at Morgan Stanley, has decades of experience in financial markets and the global economy, and has a good track record of calling major events. Like the internet bubble around the turn of the century, the 2008 credit crisis, and the collapse of China’s housing market.

Now, he says, the AI fantasy bubble is next.

The American idea of winning is that you create a god. That God lives in San Francisco and works for America. Right now, there’s a money bubble that’s based on nothing. That will come to an end. - Andy Xie

Or, as Braden Dennis from Fiscal.ai told us on our podcast (see episode below):

“How much are you willing to spend to build a digital god? Everything.”

AI, or Artificial Intelligence, was the buzzword of 2024, and appears to be the buzzword for 2025 as well. It’s everywhere: in the news, on your phone, in workplace conversations. Some call it the invention of a lifetime. A few big tech CEOs say it will be bigger than the internet. It seems like you can’t spend enough on the next big thing.

But, like everything in life, nothing lasts forever. All signs point to us living inside a massive, ever-expanding balloon. One that’s been growing for a while and could keep growing for some time, but sooner or later, it’s going to burst.

American vs. Chinese AI

The #1 factor that will determine whether the United States or China wins this AI-race, is whose technology is broadly adopted by the rest of the world. It will be determined by network effects. 18% of the world lives in China, 4% in the U.S., 78% lives somewhere else. - Brad Smith (Microsoft)

Xie says the U.S. and China are on very different paths, and that the West’s AI strategy has gone off course.

In China, AI has focused on practical, real-world uses, such as improving manufacturing, mining, and production. The Chinese goal is to create technology that makes things work better, cheaper, and faster.

The United States has taken a different path. In the U.S., the focus has been on large language models (LLM’s) or AI-software systems that can chat, write, and create images or stories. They’re impressive and entertaining, but the economic payoff is still unclear.

The U.S. approach is very expensive, and aimed at markets that can afford it, with the expectation of high returns. It’s built for high-paying markets. China’s vision isn’t all about “winning.” DeepSeek is open source, anyone can download it, and it costs far less to run than OpenAI (<10x). China takes the opposite route: make products just as good, but at a fraction of the cost, a model that fits emerging economies where people have little money.

This difference will have broad consequences. The West (read: Europe and the U.S. mostly), will remain behind a wall of high costs. Not just in AI, but in many sectors. Over the next decade, the Global South will integrate, while the Global North stays behind that wall.

In the U.S., money has no meaning. There’s so much of it. A company can be worth a trillion dollars just like that. OpenAI gets $100 billion to experiment. It’s not profitable, yet it’s already worth hundreds of billions. Money means something entirely different in America. - Andy Xie

Why is there so much money in the U.S. you might ask?

It all started in 2008 when the U.S. started quantitative easing. QE is when a central bank creates new money to buy financial assets, like government bonds, to stimulate the economy.

2008 was extremely tough for (central) banks and the economy. 12 years later, the COVID-19 pandemic hit, and QE doubled under the Biden administration to stimulate the economy even further. People were worried about staying alive, yet (software) the stock market went through the roof.

So how is this a problem? What’s going on?

The effects of central bank policy reach far. They have distorted the economy. Everyone is playing with money, but not many people are doing useful work. If you ask an American what they do for a living, it turns out not many are doing anything practical. Everyone is a consultant, a lawyer, or a social activist. But everyone gets paid well. That couldn’t happen in China. In China, it’s hard to make money, everyone has to work hard for little pay. The U.S. is a fantasy land. I think that will cause problems soon. - Andy Xie

A resilient AI-bubble

“The U.S. bubble is very resilient for structural reasons. It’s hard to break.” - Andy Xie

Three giant asset managers: BlackRock, State Street, and Vanguard, control 80% of the U.S. capital market. Their combined influence can stabilize declines and keep the bubble alive. It’s worrying because when so much market power is concentrated in a few hands, hype-driven bubbles can inflate far beyond reality, and when they pop, the fallout will be massive and widespread. It’s a fragile system.

AI today has many similarities to the dot-com bubble. The moment investors hear “AI,” money starts pouring in.

NVIDIA is one of the biggest winners in this hype cycle. Big tech companies buy its chips to build cloud infrastructure, while startups use them to train AI models. These startups raise huge sums from investors and venture capital, promising they’ll own the future. Whether the business model makes sense doesn’t matter, the goal is to ride the hype until they can sell to a bigger buyer at a higher price.

“It’s all based on a dream. It doesn’t matter if AI works or not, it just has to stay hot for another year, so early investors and founders can cash out. There are bigger fools down the road. ” - Andy Xie

In practice, many entrepreneurs are simply raising money to build yet another AI model with NVIDIA’s chips. The cash flowing into these startups is what fuels NVIDIA’s profits; its earnings come directly from other people’s investments. Whether those investments ever pay off is irrelevant to most backers.

Pop the bubble

So how does the AI-bubble, or any bubble for that matter, pop? Xie thinks this bubble will eventually burst through two possible triggers:

1. Foreign investors stop buying U.S. debt, which would send interest rates much higher.

2. Persistent inflation, making it impossible to keep printing money without major consequences.

If the bubble bursts, it won’t just be America’s problem. Housing prices around the world could drop, living costs in rich countries would get cheaper, but asset values, your home, stocks, investments, would shrink. Politically, things could get ugly, with some countries looking for someone to blame. China could easily become the scapegoat.

Our thoughts on AI and ‘the bubble’

The U.S. economy has some real issues: a federal deficit growing by a trillion dollars every 100 days, 60% of people barely getting by, and 20% buying groceries on credit or using “buy now, pay later” schemes. Yet the stock market and the broader economy keep humming along, thanks in part to a financial system designed to keep the party going.

We think AI will be massive. It’s going to make companies more efficient, create new jobs, and make others obsolete. That’s just how technological shifts work. We also think the U.S. debt deficit is becoming a bigger and bigger problem, one that will eventually have to be addressed. And yes, the AI hype has pushed some companies to ridiculous valuations… but that always happens in manias, and it often creates even better opportunities elsewhere.

Even if Andy Xie turns out to be right about how this all plays out, the world will recover. It always does. We’re cautiously optimistic about the future, and about the capitalist system’s ability to survive.

That said, we also believe we’re in dangerous territory. You can call it an AI bubble, you can call it a monetary bubble, at the end of the day, it’s still a bubble. And bubbles, by definition, pop. History shows they form when there’s too much money chasing the next shiny thing. Right now, that shiny thing is AI.

That’s why we stick to what we can actually control, our circle of influence and our circle of competence. We can’t change how much capital BlackRock moves or how much debt the U.S. racks up, but we can decide where to put our money, which risks to take, and which noise to ignore. In markets like this, discipline matters more than predictions. We focus on businesses we understand, leaders we trust, and valuations that make sense, even if that means sitting out the hottest trades of the moment.

In bubbles, the easy money is made by the bold, but the lasting wealth is built by the patient. - The Dutch Investors

We’re not rooting for a crash. But the longer a bubble inflates, the bigger the mess when it bursts. And when it does, we’ll be ready, with our watchlist of high-quality companies that we believe will survive the storm and come out stronger on the other side.

The Dutch Investors

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For our Dutch readers, feel free to view the video as well.