The relentless artificial intelligence frenzy is pushing global markets to unprecedented heights, but beneath the surface lurk dangerous economic fissures and rising uncertainty that threaten to undermine the fragile global recovery.
The Great Divide: Policy Makers Grapple with Conflicting Signals
Recent IMF-World Bank meetings in Washington, DC revealed a deeply divided and uncertain policy community. The uncertainty has broadened ominously since the spring meetings, with experts questioning everything from potential US recession risks to the legality of Trump tariffs and the viability of the massive AI build-out.
The Atlanta Fed Nowcaster suggests US growth last quarter tracked an impressive 3.9 percent, far from the tariff-induced recession many feared. However, this strong headline growth masks significant underlying weaknesses. Surging AI investment has been responsible for much of recent growth—without it, US growth would have averaged just 1 percent in the first half of 2025.
The US labor market has virtually stalled, typically a precursor to recession, while inflation pressures continue building as tariffs slowly pass through to consumers. This combination of slowing job growth and rising prices puts increasing pressure on American households.
AI Mania: Promise Versus Peril
The global obsession with artificial intelligence shows no signs of abating. Global investments in data centers have jumped from $400 billion in 2024 to an estimated $600 billion in 2025, with projections reaching $3-4 trillion annually by 2030.
Some economists like Nouriel Roubini believe AI will drive exponential productivity growth, creating winner-takes-all outcomes that make first-mover advantage crucial. The Richmond Fed suggests we may only be in the second inning of a nine-inning baseball game when comparing current AI investment to the 1990s telecom boom.
Stock market frenzy reflects this optimism, with just 30 AI-related stocks now accounting for 44 percent of the S&P's market capitalization. However, critical questions remain unanswered: Will use-cases justify these massive investment levels? To what extent will AI substitute rather than augment labor? Could income distribution become even more skewed toward capital at labor's expense?
Global Implications and Fiscal Dangers
Taiwan's experience provides a cautionary tale. As the epicenter of the AI boom, Taiwan's exports to the US are growing at a sizzling 50 percent pace, pushing GDP growth to 7 percent. Yet the capital-intensive nature of AI build-out has created no positive spillover to jobs and consumption. Despite booming AI exports, consumption growth averages less than 1 percent and consumer confidence is falling.
The situation became so concerning that Taiwan's government had to roll out a 2 percent of GDP fiscal package in September despite the AI mania. This pattern could repeat globally as countries struggle with unsustainable fiscal deficits.
G7 public debt already stands at 125 percent of GDP and is expected to rise to 140 percent by 2030. The US fiscal deficit runs at almost 8 percent of GDP for an economy above its pre-pandemic path, while Japan's public debt reaches 230 percent of GDP with additional fiscal packages planned.
Deglobalization Accelerates Amid Legal Battles
US tariffs have reached their highest levels since the 1930s, signaling an inexorable descent toward deglobalization. The US Supreme Court is now hearing whether President Donald Trump's invocation of the International Emergency Economic Powers Act to impose tariffs is legal. If deemed illegal, the US treasury would need to refund approximately $100 billion of tariff revenues, creating additional fiscal pressure.
Five years post-pandemic and one year into Trump's presidency, underlying macroeconomic fissures have only widened. Emerging markets continue grappling with pandemic-induced scarring while confronting China Shock 2.0—an avalanche of cheap Chinese imports.
The promise of artificial intelligence on productivity is matched only by its peril on unemployment, occurring when countries lack fiscal space to backstop labor markets. While equity markets ignore these contradictions, propelled by AI frenzy to ever-new highs, the pressures and problems of the present are being overlooked for the yet untested promise of the future.
Markets may be priced to perfection, but reality rarely follows suit. The global community remains divided and uncertain on both economic prognosis and policy response as these fundamental tensions continue building beneath the surface of the AI-driven market euphoria.
