The New York Times reports:

[Larry Ellison’s] big bet on A.I. was built on an astronomical amount of debt in every imaginable form — bonds, letters of credit, asset-backed securities — available in seemingly unlimited quantities, because the more you spent building A.I. infrastructure, the more you would earn, or so the logic went. Computer theorists called it the scaling hypothesis. It held that advancements in A.I. were directly tied to the generation of unprecedented amounts of computing power to process unprecedented volumes of data. Reaching the holy grail of artificial general intelligence, or A.G.I., when computers match or surpass human thinking at any task, was going to require bigger data centers and a lot more of them. It all came down to capital expenditures — capex, in the lingo of the Valley. Whoever controlled the most computing power would control the A.I. economy.

But lately, some investors and analysts have started questioning the scaling hypothesis or at least asking if all this spending is sustainable. The market has been gyrating wildly in recent weeks, as concerns have grown about whether the trillions of dollars being furiously pumped into this global ecosystem of data centers will ever return the promised profits.

A year and a half after his triumphant trip to the White House, Ellison may be poised to become something else: a cautionary tale. David has slowed his stop-at-nothing effort to push through his deal to acquire Warner Bros. Discovery in the face of a lawsuit from a group of state attorneys general. Ellison is personally worth about $55 billion less than he was on the morning he flew to Washington, and more than $200 billion less than he was at his peak in September. Oracle has pushed the limits of the credit market and is facing steeper interest rates from lenders, and its credit rating has been downgraded to a notch above “junk” status.

Ellison and his hyperscaler peers are confident that all of their borrowing and spending will set them up to dominate a transformed global economy. As a percentage of the nation’s G.D.P., the great A.I. infrastructure build-out is on track to exceed the construction of the American railroad system during the second half of the 19th century, the building of the Interstate highway system 100 years later and the Apollo space program.

The hyperscalers — Alphabet, Amazon, Meta, Microsoft, Oracle — are some of the richest companies in the world, and the stock market is heavily dependent on them for its growth. If Oracle were to falter, the repercussions could be wide-ranging. Americans are more invested in the stock market than ever before, and the A.I. boom has been driving a disproportionate amount of America’s economic growth. Last fall, Gita Gopinath, a former chief economist at the International Monetary Fund, writing in The Economist, estimated that an A.I. crash would wipe out $20 trillion in American wealth — far more than the dot-com crash in 2000 or even the 2008 financial crisis. [Continue reading…]