Just like with the yen, America cannot save the AI bubble
In a rare intervention, the US has propped up the Japanese yen. The move is seen as a bid to hold off a further rise in yields for US government bonds – amid Japan’s sell-off of US Treasuries to fund its shoring up of the yen – a rise that threatens the US artificial intelligence bubble. That the United States bought yen for the first time in decades – coordinating with Japan – had a bigger…
In a surprising move, the United States has recently stepped in to support the Japanese yen. This effort aims to prevent a surge in yields for US government bonds, resulting from Japan's efforts to stabilize the yen by selling U.S. Treasuries. By purchasing yen for the first time in decades, the U.S. has made a significant psychological impact on the market.
However, market analysts predict the yen-to-dollar rate will rebound above 160 within three to four weeks. The yen has been weakened due to the rise of Chinese electric vehicles, affecting Japan's car exports, and the energy price spike following the Iran war, which has hurt the overall economy. Experts believe that technical interventions alone cannot halt the yen's decline.
The Japanese car industry, which has been a key part of the economy, is not pivoting quickly enough to electric vehicles, and China's rapidly growing influence poses a further threat. Moreover, Japan's energy import costs are surging, with the Middle East accounting for 90-95% of its oil. The recent trade deficit in June is a warning sign for what is to come.
In response, Tokyo is depleting its reserves to sustain the economy. The Iran war could also lead to oil infrastructure destruction, plunging Japan's economy into a critical situation. The Japanese economy now faces significant challenges in the coming months. The country has minimal scope to raise interest rates to protect its currency, as its debt, which is about 13.5 trillion yen (US$84.8 billion), is more than twice the GDP.
Defending the yen may require Japan to sell U.S. government bonds and purchase yen to ease the decline. However, this action has led to U.S. government bond yields reaching levels last seen in 2007, just before the subprime crisis burst and sparked a global financial crisis. The rapid rise in bond yields could burst the AI bubble.
However, the most pressing issue is the emergence of China's open-source, open-weight AI models, which offer equally effective services at lower prices. The U.S. AI bubble relies on two support systems: liquidity from pandemic-era quantitative easing and the promise of productivity gains. The growing pressure on U.S. interest rates to rise threatens the first pillar, while Chinese competition limits the high charges U.S. AI companies can demand for their services.
As the market begins to realize the value of American AI firms is determined by competition, the likelihood of a price war with Chinese creators seems inevitable. The AI market might need to raise hundreds of billions from the stock market to sustain this bubble. The U.S. government may ban Chinese AI for national security reasons prior to the anticipated listings of OpenAI and Anthropic.
Their best-case scenario involves milking the U.S. market. Nevertheless, will investors still commit hundreds of billions of dollars? If the listings fail, the AI bubble could burst, causing the largest liquidity bubble since 2008 to collapse as well. The U.S. stock market capitalization is now 2.3 times the size of the economy, surpassing the pre-dotcom crash and pre-subprime crisis bubbles. When this bubble bursts, the impact will be felt across the globe.
Written by urgent.news from South China Morning Post's reporting — not their text. Machine-written — may contain errors; check the original before relying on it.
