Tl;dr is:

A temporary overvaluation can build enough real capital that the economy lands in a permanently higher-capital equilibrium, even after the inflated valuations correct. The future for AI companies may look rather iffy, but the whole economy may not be as screwed as some fear.

The book Boom argues something similar

https://press.stripe.com/boom

This has strong signs of LLM writing, potentially Claude.

"Workers supply labor, hold no assets, and consume their wage." Ouch. There was a time in the US when most capital was the assets backing workers' pensions.

We've seen speculative over-growth with a good legacy at least three times in the last three decades. First was the dot-com boom. Overpromotion made it necessary for every business to have a web site. That wasn't pre-ordained. The Web could have maxed out as a distribution system for catalogs, data sheets, academic papers, and similar business to business info. Overpromotion created the business to consumer web, which turned out to be useful.

The second overbuild was long-haul fiber optics. Look up Global Crossing. So much fiber was put into the ground and water that intercontinental spam is not a problem. That didn't have to happen. If traffic was billed, it wouldn't have happened. It turned out to be useful, but was not pre-ordained from the economics.

A third overbuild was the solar panel industry, especially in China. So much money was thrown at solar panel manufacturing that the price became very, very low. Solar deployment accelerated and started to take over, after decades of panels costing too much. Now China has a solar panel glut. They're dealing with it intelligently - minimum efficiency standards are coming into effect, and pollution controls on panel manufacturing are being tightened.

I won't pretend to fully understand the paper, but I did try to read it.

A few notes:

1. This assumes that there is notable ROI on 'AI labor'. That is still up for debate.

2. This assumes that the interests are currently falling, unless I misread the paper.

3. This affirms that we are in an over valuated, speculative bubble which will inevitably correct; but it needs to "correct" at the exact right time defined by multiple factors.

First, "correction" can be an euphemism for a disastrous financial crisis. It could take years and years for most people to see the end of the tunnel. I don't know if the end justify the means.

Do we really need to engineer a financial crisis to build more energy facilities? And will they be built the 'right way', using renewable energy for example? What if we invested half of those trillions directly in socially impactful measures, instead of having the money flow through a speculative bubble first?

Finally, I am not an economist, but I wonder how accurate a mathematical model is to the real world - i.e. what happens to the model when Donald keep changing the opening hours of the Hormuz?

It does feel a bit like trying to read tea leaves to me. This reminds me of Hari Seldon's psychohistory:

> In Foundation (1951), famed mathematician and psychologist Hari Seldon has developed the science of psychohistory, which uses sophisticated mathematics and statistical analysis to predict future trends on a galactic scale. He has predicted the unavoidable and relatively imminent fall of the Galactic Empire, and intends to establish the Foundation, "a repository of crucial, civilization-preserving knowledge" that will enable society to revive itself more quickly and efficiently [...] [1]

---

[1](https://en.wikipedia.org/wiki/Foundation_universe#Psychohist...)

    If enough capital has been installed before learning removes the wedge, the economy lands in the high-capital state,

I’m gonna need an honest caveat on the load-bearing assumption here.

No word about taxes and the paper describes workers as being “protected on the downside.” while the model has removed the downside risk that workers actually face. I could write a long essay with all the issues this "paper' has.

Truly dismal science of an Economics professor at MIT.

This reads like a propaganda piece aimed at mathematically inclined knowledge workers to try to stave off risk perception as their economic and political power is undermined by the US shift towards kakistocracy.

"workers operate with a larger conventional capital stock and wages rise even as the worker share falls."

Liberal Democratic capitalism splits power into two primary buckets: political and economic.

Marx provided the critique of consolidated economic power. The Soviet union proved the dangers of consolidated political power and Hayek made the mechanism explicit.

The "election tampering" BS is their attempt to try to undermine plutocratic political power. This looks like an attempt to justify the insane concentration of economic power that clearly goes against Hayek's description of free markets as a mechanism to discover preferences. Whose preferences?

If worker share is falling, workers are losing their share of the economic voting mechanism. Whether or not the emerging capital ownership class chooses to keep rents and subscriptions affordable to the new working subclass if and when they accomplish this power grab is immaterial, no matter how much math they try to wrap the propaganda in.

So, some of the capital invested due to the AI boom may be for stuff like buildings, energy infrastructure, and other long-lasting stuff. I am reminded of all of the spending done in the runup to the Y2K, when I saw factories able to get all kinds of upgrades to equipment done, outside of the normal budgetary restraints, simply because the vendors were smart enough to say "not fixable, you'll have to buy the new model". It could happen.

However, GPUs and memory chips are some of the fastest-depreciating capital investments one can make. Overinvesting in this generation's GPU model will either be wasted (because the chips are worthless in a few years) or result in a lot of underinvestment in future years (because instead of replacing those GPUs with newer models you keep using them, unwilling to admit you bought several times as much as you should have).

If we have reached the point in the cycle where the boom's proponents are trying to argue that even if it was all a mistake, maybe it's ok, then one suspects were might be late in the boom part of the cycle.