“

"

So if there is a bubble, and it bursts, causing a recessionary period, it could eventually result in lower inflation, benefiting lower and middle income earners.

This would work by a fall in GDP and rise in unemployment forcing expansionary fiscal and monetary policy to increase aggregate demand. Unemployment, yes, may be high, but with a lower price level, and then a slow but upward growth in demand, manufacturers and producers will begin to make more profit, and in turn, slowly begin to hire more, bringing everything back to equilibrium - at a new lower price level and at a natural rate of unemployment.
(This is all my own writing, may be incorrect, but verified for correctness using this).
This is all graphed below.

Source: https://x.com/Markzandi/status/1967914286438576289/photo/1

More allocation of resources to other sectors
A point raised by Derek Thompson in his article on how the AI bubble will pop, is “AI spending is already warping the 2025 economy” - this is evident by the decrease in investment in areas without AI. It makes sense - if you came to a group of investors and asked for funding, well good luck matey, the bar just got higher. They’re comparing your returns to the returns of AI. As pointed out by Paul Kedrosky in Thompson’s article/podcast, this happened during the 1990s where there was a “diversion of capital away from manufacturing in the United States. This starved small manufactures of capital.”

Cons of a bubble:

Wealth destruction
According to Forbes, the Mag7 now accounts for 36% of the S&P500. The remaining 64% of the index is spread across 493 other companies. 36% is a big deal when peoples superannuation funds or investments are invested in these stocks. It was only eight years ago when the S&P500 accounted for 12.4% of the S&P500. Nvidia has been especially powerful, reigning in at number 1. To make things more fragile, these companies, like Nvidia, Microsoft, AMD, and OpenAI, are all interconnected - it’s like a “money merry go round.” (UniSuper, 2025). The collapse of one is likely to have great ramifications, which will manifest into larger problems.

In private equity, VC and startups:
Whilst Bezos says, “every experiment gets funded, every company gets funded”, which may be a positive thing, this does mean a lot of capital being invested in AI will not deliver returns, as said by Goldman Sachs chief executive, David Solomon.

Another investor, Sameer Dholakia, at Bessemer Venture Partners, says “the market is investing as if all these companies are outliers. That’s generally not the the way it works out.” Co founder and chief executive of Salesforce, Marc Benioff adds, “There will be casualties. Just like there always will be, just like there always is in the tech industry.”

Considering the top 10-20% are fuelling consumption in the US, if their investments go sour, this will have a major impact on the US economy, and then globally too.

Recession and unemployment
According to an article by Provise Management Group, because of lower aggregate demand, manufacturers and producers cut jobs, so unemployment will rise. A cut in jobs also means a fall in tax revenue, increasing the budget deficits. On top of rising unemployment, and budget deficits, the value of assets like homes will fall.


Conclusion

As well noted by Yale Insights, Charles Mackay who wrote a book on the psychology of crowd behaviour, said “Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.” This is eerie, and comparable to the current FOMO happening in AI…


REFERENCES

Bradshaw, Tim. “Jeff Bezos Hails AI Boom as “Good” Kind of Bubble.” @FinancialTimes, Financial Times, 3 Oct. 2025, www.ft.com/content/8d80f601-4725-489a-8d6e-39099a01f9cb.

Branco, Jorge. ““A Dangerous Game to Play”: Are We Really in an AI Tech Bubble and What Happens If It Bursts?” @9News, 9News, 17 Oct. 2025, www.9news.com.au/technology/are-we-in-an-ai-tech-bubble-what-happens-if-it-bursts-explainer/c11d1f63-a085-419d-bc62-030911459304. Accessed 19 Oct. 2025.

Brock, Catherine. “S&P 500’S Weight in Mag 7 Stocks Passes 30%. Is This a Diversification Risk?” Forbes, 26 Aug. 2025, www.forbes.com/sites/investor-hub/article/sp-500-weight-mag-7-stocks-diversification-risk/.

CFA®, Daniel Mannix. “The Pros and Cons of a Recession from a Financial Planning Perspective.” ProVise Management Group, 20 Jan. 2023, www.provise.com/the-pros-and-cons-of-a-recession-from-a-financial-planning-perspective/.

Conboye, Janina, and George Hammond. ““Of Course It’s a Bubble”: AI Start-up Valuations Soar in Investor Frenzy.” @FinancialTimes, Financial Times, 16 Oct. 2025, www.ft.com/content/59baba74-c039-4fa7-9d63-b14f8b2bb9e2?utm_campaign=feed&utm_medium=referral&utm_source=later-linkinbio. Accessed 18 Oct. 2025.

Hayes, Adam. “Boom and Bust Cycle.” Investopedia, 19 May 2024, www.investopedia.com/terms/b/boom-and-bust-cycle.asp.

Liberto, Daniel. “How Do Asset Bubbles Cause Recessions?” Investopedia, 1 Dec. 2022, www.investopedia.com/articles/investing/082515/how-do-asset-bubbles-cause-recessions.asp.

Paulo Carvão. “Is AI a Boom or a Bubble?” Harvard Business Review, 16 Oct. 2025, hbr.org/2025/10/is-ai-a-boom-or-a-bubble.

Sonnenfeld, Jeffrey, and Stephen Henriques. “This Is How the AI Bubble Bursts.” Yale Insights, 8 Oct. 2025, insights.som.yale.edu/insights/this-is-how-the-ai-bubble-bursts.

Sonnenfeld, Jeffrey, and Joanne Lipman. “Grok and Groupthink: Why AI Is Getting Less Reliable, Not More.” TIME, Time, 16 July 2025, time.com/7302830/why-ai-is-getting-less-reliable/.

Thompson, Derek. “This Is How the AI Bubble Will Pop.” Derekthompson.org, Derek Thompson, 2 Oct. 2025, www.derekthompson.org/p/this-is-how-the-ai-bubble-will-pop. Accessed 19 Oct. 2025.

UniSuper. “Investment Update with John Pearce.” Unisuper.com.au, 2025, www.unisuper.com.au/Articles/2025/10/Investment-update-with-john-pearce-october-2025?utm_source=comms&utm_medium=email&utm_campaign=ivmu_oct2025. Accessed 18 Oct. 2025.