[Answered] Critically analyze the proposition that AI frenzy in markets masks underlying economic fissures. Examine the risk of rising uncertainty when asset prices are divorced from economic reality.

Introduction

Global investment in AI and data centres is projected to rise to $3–4 trillion annually by 2030 (IMF), fuelling a stock market boom. Yet rising valuations risk obscuring widening macro-economic fissures.

AI Frenzy vs Economic Reality

1. The recent surge in asset prices—especially in tech and AI-related stocks—has created what many economists fear resembles a “speculative asset bubble”, where market capitalization detaches from real economic fundamentals.
2. In the U.S., just 30 AI-linked firms account for 44% of S&P 500 market capitalization (Richmond Fed, 2025).
3. IMF and World Bank observations at their 2025 annual meetings underline growing uncertainty on recession risks, labour market stagnation, and fiscal instability.
4. Such concentration violates the principle of market breadth, making markets vulnerable to abrupt corrections.
5. The Atlanta Fed Nowcast suggests Q2 growth at 3.9%, yet removing AI-induced investments reduces GDP growth to nearly 1%—revealing structurally weak demand.

Underlying Economic Fissures Masked by AI Optimism

1. Labour Market Weakness Despite Growth: The U.S. labour market is “stalling”, a classical precursor to recession. Taiwan’s example illustrates AI-induced jobless growth: GDP grew 7%, but consumption growth stayed below 1%, forcing fiscal stimulus—demonstrating capital-intensive growth without employment spillovers.
2. Fiscal Stress and Rising Public Debt: G7 public debt is at 125% of GDP, expected to touch 140% by 2030 (IMF Fiscal Monitor). The U.S. runs a fiscal deficit of nearly 8% of GDP, despite being above the pre-pandemic growth trajectory. This violates counter-cyclical fiscal discipline.
3. Deglobalisation and Tariff Uncertainty: Trump-era tariffs push the U.S. tariff levels to the highest since the 1930s, triggering retaliatory trade measures—threatening global supply chains and increasing inflation.
4. The Fallacy of Composition (Keynes): Belief that individual firm productivity gains from AI translate into national economic gains may be flawed. If AI becomes labour-substituting instead of labour-augmenting, income distribution worsens and aggregate demand falls.
5. Asset–Price–Real Economy Divergence: Market euphoria echoes the Dot-com bubble (2000) and Tulip mania (1637). Nobel laureate Robert Shiller’s “Irrational Exuberance” framework warns that narratives often overshadow financial prudence during technological hype cycles.

Systemic Risks from AI Asset Bubble

The International Labour Organization (ILO) warns that AI may displace jobs fastest in economies without robust social safety nets, deepening inequality and social unrest.

Conclusion

As Robert Shiller cautions in Irrational Exuberance, markets often chase narratives, not fundamentals. Sustainable growth demands linking asset prices to real productivity—not speculative optimism fueled by AI mania.