AI is becoming a source of serious systemic economic risk. One of the key themes is that financial instability is going to arise from an asset bubble, unemployment risk, inflation, and infrastructure constraints. They all exist within the political economy of technological change, which, when combined, means that they reinforce each other. That is why we are ending up with systemic risk. These are not isolated issues; they are literally threatening to drag down the whole of our economy.
Global equity markets remain absurdly high. They are at record levels. We have already seen them go beyond the peaks at the end of 2025 in the first week or so of 2026, and so far there has therefore been no global reaction to the overinflated value of AI company shares. But it remains the case that these valuations assume perfect outcomes for all the investment that is being made in AI, and there is simply very little evidence to suggest that this is going to happen.
The investment pouring into data centers, chips, and energy-intensive infrastructure is not sustainable. When that becomes apparent, it will be clear that much of the current spending on these issues is likely to be wasted—some of it so vast that we are discussing the equivalent of the entire income of whole countries going to waste as a consequence of what is happening.
What we now know, and what is becoming increasingly apparent, is that there is a very high degree of risk of contagion when that share crash happens. People are borrowing to buy shares in AI companies. If the value of those shares falls, the collateral that has been provided for the loans made available to those buyers will collapse. That means banks will not be able to recover their money, and there will be a market crash, not just an AI share price crash.
This is now a question of when, not if. Moreover, it is a matter of when the shadow banking system will also collapse, because that system has provided roughly half of the money likely to have been invested in these shares. Shadow banking is the parallel banking system that exists outside regulation and includes private equity funds, hedge funds, and similar lenders who are not subject to banking regulation. They too are at enormous risk—if anything, at greater risk than the banking system itself—because the margins for error are simply higher due to the lack of regulation.
This means there is massive recessionary pressure likely to arise as a result of this crash. But even without a crash, recessionary pressure is going to exist. So far, commentators agree that AI is creating increased profit potential for large companies, but not by creating new products. The profit potential comes from cutting costs, and cutting costs primarily means reducing the number of staff employed or lowering pay rates by replacing workers with lower-paid employees.
The point is that key people in our society will be made redundant, and this will have massive knock-on effects. It will affect confidence, meaning people will save rather than spend. It will also have an impact because people will quite literally be out of employment, leading to rising unemployment.
As a consequence, demand on government spending will rise due to unemployment, while multiplier effects within the economy will weaken. In other words, there will be less money flowing into the economy from people in employment, and therefore less for businesses to receive as income, to spend on their own employees, or to invest. All of this creates a downward spiral of economic decline. Cost-cutting always results in recessionary pressure, whether it comes from AI or anything else.
That is the outcome, and it is going to give rise to forecasts of stagnation. We are already hearing these forecasts. Serious merchant banks are now claiming that this is the inevitable outcome for the global economy in 2026. That AI is risking deepening recession is something we now have to accept as inevitable.
References
https://www.weforum.org/stories/2025/08/the-overlooked-global-risk-of-the-ai-precariat