THIS IS NOT DEBT. With debt you are given money that you can spend, and then you have to pay interest for a while and then return all the money you spent.
These are signed contracts for future spending. However, we don't know what the terms are for those contracts and how easy it is to get out of them. For example, with Anthropic and Google's contracts with xAI's compute, they signed a long term contract, but they can get out of the contract with 3 months notice. That isn't a good indication of future spend. The same goes for all of these $3.2T, so these numbers are sus at best.
This very much is debt. Is it your contention that debt can ONLY arise with an exchange of cash? Because as an accountant I find this preposterous. Under IFRS 16 we recognise, for example, long-term leases as debt, because they are obligations to the business. An obligation to pay in the future is almost the definition of debt. An interest rate is not part of that definition, necessarily.
A liability is not necessarily debt. You can have liabilities on your balance sheet for future obligations base on current circumstance. But the terms of those liabilities might allow exiting without fully realizing them.
> long-term leases as debt, because they are obligations to the business
I don’t think this is how your average reader of this would interpret debt.
When I and most people think of debt they think a negative equity account balance that you pay off to a bank or lender like a mortgage or credit card. Not a 24 month apt lease because no equity is being exchanged.
In part because of the reason OP said which was severability which isn’t something you can do with owed debt.
Graebers debt demonstrates that this is the most common way to think about it.
This is very much like the 2008 disaster. You effectively have debt laundering happening whereby speculative income / debt is manufactured into higher grade than it is by passing through multiple parties / steps / debt-like vehicles that look independent but in fact incorporate cumulative risk built on highly correlated factors. Downstream party D has no visibility that the specific uncertainty emanating from party A upstream is 100% correlated with their own risks, along with parties B and C through which the liability passed on the way to them. What looks like independent risks are actually all the same risk and completely fragile to a single event that has quite a high probability of occurring.
Part of the problem if I understand correctly is that many of these commitments are now used to value related companies. I.e. if the some of the contracts are cancelled, many companies will drastically have reframe their profits/stock prices etc.
One thing the tech giants are worried about are being left behind on expanding their compute. So what do they do? Sign a contract to agree to purchase $XT in compute over the next X years. It’s like buying an option - it’s a right, not an obligation to purchase.
If I were an investor and spent $10,000 to buy options to purchase $1,000,000 in Google stock, it’s not “$1,000,000 in hidden debt”
I very much hope this, and other threads on the financially insane behaviour of the tech sector get more surface. I don't think having this die in "new" is helpful because this stuff, the norms of how business looks at the balance sheet and decides what is, and is not rational business investment, this stuff is -> important <-
This is a significant proportion of the market. Having this amount of money not understood is harmful.
Not that I don’t agree with you in many ways, but if I was going to push back a little bit I’d ask you this:
Is this money not understood by the tech giants taking on the debt? I imagine they understand exactly what’s going on.
I think the way they see it is that it’s riskier for them to miss out on timing this investment.
The other question is “where else should they put their money?” Tech giants before the AI boom made a heck of a lot of cash that they had nothing they could do with it. Remember before AI when the existential crisis was stock buybacks? That was a bunch of companies who had so much profit that all they could think to do with it was buy their own stock back.
I am sure there will be a bubble pop, correction, general downturn, or something like that, but the question remains how much it’s actually going to matter. If AI blows up in Microsoft or Google’s face they’re just going to write it off and spend a decade paying zero income tax, or whatever other clever corporate accounting gets them out of that pickle.
> That was a bunch of companies who had so much profit that all they could think to do with it was buy their own stock back.
If you or your retirement is a shareholder in one of these companies, you'd rather they return $100 billion to you with boring buybacks or dividends than put it in an exciting AI investment that returns $1-$10 billion. Even though it didn't end up completely worthless, it's still a bad investment.
> If AI blows up in Microsoft or Google’s face they’re just going to write it off and spend a decade paying zero income tax
As a shareholder, you'd also rather they return $100 billion to you than put it in a bad investment that returns $0 -- even if that bad investment lets them write off $20 billion in taxes over the next 10 years you'd still be $80 billion better off.
> how much it’s actually going to matter. If AI blows up in Microsoft or Google’s face
An AI winter shouldn't be an existential threat to these companies -- but "the share price is 10% - 20% lower than the counterfactual where they didn't make these questionable investments" still represents a lot of lost wealth for shareholders -- billions (or trillions for the industry as a whole). A lot of that wealth is the hands of ordinary people, often through retirement investments in index funds.
> If you or your retirement is a shareholder in one of these companies, you'd rather they return $100 billion to you with boring buybacks or dividends than put it in an exciting AI investment that returns $1-$10 billion.
If you’re a retireer yeah you just want a steady dividend (or buyback).
But i mean for a 401k that won’t be spent from for 20+ years you absolutely want business to be investing into themselves. Otherwise go buy gold.
I think the way many of these companies see it is that the downside risk to not investing is that some of their verticals move into irrelevancy.
E.g., if Google doesn’t invest in AI then AI will kill their search engine business. A lot of us don’t love the Google search AI Overview but now they’re competing directly with ChatGPT, and they’re essentially not a search monopoly anymore.
One way to look at a bust AI investment is the destroyed value of the stock like you mentioned, but perhaps that’s somewhat hindsight-biased? Perhaps the reality for some companies is that if they sit on their hands and do nothing they lose 40% of their company value and if they spend a ton of money on AI they lose 20% of their company value. Of course we don’t know the outcome yet.
I think the that they feel the need to do these off balance sheet shenanigans is the issue. They're obviously extremely worried that their credit rating is going to be downgraded otherwise, why bother?
The company budgets cannot sustain this. Behemoths like Google and Amazon with insane balance sheets are now on their knees begging for loans.
We (as a country) should contain our exposure to this insanity. If companies want to go bankrupt let them go, but we cannot strangle the liquidity of the entire market to feed the ambitions of these handful of companies.
This is quite misleading. It includes numbers for commitments for leases of data centers and payments for power that are decades into the future.
Even if AI completely busts and all of these servers are worthless that doesn't mean the data centers are. There's still a need for data centers to host non-AI servers. The hyperscalers will close/sell other data centers and serve from places where they have long term commitments at.
3.2 trillion sounds like a lot until you spread it over 20 years and half a dozen trillion+ dollar companies. It's hard to tell how much a bag they're holding but it's almost certainly negligible compared to revenue and market cap. The only real systemic risk is the risk of for some reason not needing any data centers.
As I've been pointing out a little bit recently -- the 'downside' scenario -- somehow we conclude we have enough inference at our world's desired quality and therefore demand stabilizes below that of these datacenters -- would be GREAT for the world. Super cheap intelligence for all.
If some lenders go bankrupt on a datacenter note post-buildout and the capital structure is reworked, lowering the costs by removing capitalization costs from the cashflow of the inference provider, that is all to the good of people who did not do the initial lending.
I think that is extremely unlikely, but it's good for datacenter doomers to think through these scenarios IMO.
Your take seems a bit optimistic if we use the dot-com boom as an analogy. The dot-com boom sped up a massive infrastructure build-out, but also left damage that lasted for a very long time, with many organizations collapsing, and others taking a very long time to recover (e.g. cisco networks). It also seems that these 'data-centers' have a higher depreciation rate than 'dark-fiber' did post-dot-com, which means that there is likely to be greater capital waste.
I am not sure whether the dot-com boom was a net-positive, and the AI boom may be less productive.
It absolutely was a net positive. On the infrastructure side we got datacenters built and tons of dark fiber put down. At the start of the boom we had only 2G cellular for goodness sake. I think you could argue we wouldn't have necessarily had the rise in cloud compute without some of the 'overbuilding' of datacenters in web 1.
For reference this 'massive build-out' resulted in, according to a Berkeley study I found, 500MW of total datacenter power in the US across 320 locations at end of 2020. This wasn't "too much for very long:" as of 2005, according to Tier1 there were 511 datacenters. And it was likely only really a year or two: Dupont's VA3 utilization numbers published it at 50% utilization in 2003, 89.4% in 2004, then full thereafter.
Meanwhile, these infrastructure improvements allowed, for example, things like the iPhone to be built and deployable -- there was 3g, there were a LOT more web devs that could create the early (web only) apps the iPhone needed to compete. This in turn allowed another round of investment to be built on top of all of that.
On the capital side, investors were also able to buy Amazon at around $1 / share. AAPL at iPhone launch was $7/share. I haven't split adjusted either of these, this is just from memory.
I don't think a bust was necessarily good but the boom undeniably built out infrastructure, a small fraction of what the world is currently using, and did it pretty quickly, and then post bust that infra got bought out in a capital efficient manner. I think that's the bear case here.
Cisco networks took a very long time to recover, but in the meantime, everyone else enjoyed massive growth in cheap connectivity.
Capital waste is only capital waste if the physical goods that were built are no longer useful for anyone. Otherwise, it's only a waste for the people who lent money.
It really depends on the "somehow". The most realistic downside scenario, it seems to me, is that most people don't care too much about super cheap intelligence for all because there ends up being another bottleneck for most of the things we value.
Like, trains are an incredible technology which transformed the world, but very few people go around counting their lucky stars that they live in a world that permits such wonders. It's a train, it gets things where they need to go, and by the way isn't it so annoying that sometimes it doesn't quite arrive when the schedule said it would?
It is, by definition, NOT debt. With debt, you are given a lump sum of money. These are spending contracts, but any contract has the ability to be gotten out of, unless your lawyers are very stupid.
All these special purpose off balance sheet things always smelled bad to me. Here’s hoping it blows up and takes all of it down 50 percent or more. Heck go 99% down. I’ll buy everything I can get my hands on.
I do wonder why HN thinks it understands risk better than the people hired at multi trillion dollar companies whose whole sole job it is to understand and minimize these risks - people who also understand the company way better than anyone on HN.
Is it possible that these companies feel they have more to lose by missing out on AI than by taking on debt? Or that they genuinely are in a race to superintelligence, which easily justifies this debt and far more?
When I worked at Apple, I remember seeing the commentariat insisting that <project> was bound to fail, that we didn't know what we were doing. When in fact extremely competent people knew precisely what they were doing. Of course, the commentariat were wrong and I'd wager most of them use what I had a part in building. The same story tended to repeat across my subsequent jobs in big tech. All this seems quite similar to me.
The FOMO argument is exactly what was used by banks in GFC: as long as the music is playing need to dance.
But current era also has echoes of capex financing (eg cisco lending to its buyers) and Enron (eg use of SPVs).
I don’t think that most people who are concerned about a bubble think people and orgs fueling it are stupid, but they’re operating with local incentive structures that can result is systematic problems.
And for folks who have lived through multiple of these (and maybe lost paper wealth, retirement savings, or homes), I think being concerned is reasonable.
They might have a conflict of interest so that they shouldn't be trusted implicitly even if they can theoretically do a better job. Also, we live in a democracy, and these are public companies. With that much money on the line, they become quasi-governmental in shaping the economy and such. If they don't like public scrutiny, probably best not to be a public company. The workings of a public company should probably be a public interest, so the public can support laws and regulations appropriate for them
The world is run by completely average people making series of mundane decisions. There is no super genius who’s job it is to understanding the risk of investing in AI.
It’s just some nameless regular guy crunching some numbers and feeding to another regular guy who interprets the numbers. And so on
HN has devolved considerably. It is practically general Reddit-tier kneejerk contrarianism now. I'm getting literal "Cool story bud" replies to me within the last day.
Year after year of the advent of LLM's has repeatedly shown HN overall consensus gettings things wrong again and again. AI lab employees aren't here they're on Twitter/lesswrong. 6 months ago Mythos was announced and it has been an absolute deluge of "it's just marketing stunts." Practically 75% of many threads had that take. Strange, we don't hear much about that anymore, now that the plethora of hacks has taken place and increasing. There will be no mea culpa, just moving on to the next kneejerk dismissal as peoples' subconscious fearfully grapples with our immediate future. They want the AI boom to fail, because the implications of what happens next when it doesn't fail is unknown and vaguely frightening to them, for now.
OR they think it is a no lose situation. (aka the US Govt will step in and buy their debt if they falter, aka privatize the profits, socialize the losses)
THIS IS NOT DEBT. With debt you are given money that you can spend, and then you have to pay interest for a while and then return all the money you spent.
These are signed contracts for future spending. However, we don't know what the terms are for those contracts and how easy it is to get out of them. For example, with Anthropic and Google's contracts with xAI's compute, they signed a long term contract, but they can get out of the contract with 3 months notice. That isn't a good indication of future spend. The same goes for all of these $3.2T, so these numbers are sus at best.
This very much is debt. Is it your contention that debt can ONLY arise with an exchange of cash? Because as an accountant I find this preposterous. Under IFRS 16 we recognise, for example, long-term leases as debt, because they are obligations to the business. An obligation to pay in the future is almost the definition of debt. An interest rate is not part of that definition, necessarily.
A liability is not necessarily debt. You can have liabilities on your balance sheet for future obligations base on current circumstance. But the terms of those liabilities might allow exiting without fully realizing them.
Naive question: are you conflating debt with liabilities? Are these two separate technical terms or are they the same?
To my lay understanding, debt means a loan you have to pay back, whereas liabilities are everything you're on the hook for.
> long-term leases as debt, because they are obligations to the business
I don’t think this is how your average reader of this would interpret debt.
When I and most people think of debt they think a negative equity account balance that you pay off to a bank or lender like a mortgage or credit card. Not a 24 month apt lease because no equity is being exchanged.
In part because of the reason OP said which was severability which isn’t something you can do with owed debt.
Graebers debt demonstrates that this is the most common way to think about it.
That is why it is "hidden".
This is very much like the 2008 disaster. You effectively have debt laundering happening whereby speculative income / debt is manufactured into higher grade than it is by passing through multiple parties / steps / debt-like vehicles that look independent but in fact incorporate cumulative risk built on highly correlated factors. Downstream party D has no visibility that the specific uncertainty emanating from party A upstream is 100% correlated with their own risks, along with parties B and C through which the liability passed on the way to them. What looks like independent risks are actually all the same risk and completely fragile to a single event that has quite a high probability of occurring.
Part of the problem if I understand correctly is that many of these commitments are now used to value related companies. I.e. if the some of the contracts are cancelled, many companies will drastically have reframe their profits/stock prices etc.
Yup. This is terrible financial reporting.
One thing the tech giants are worried about are being left behind on expanding their compute. So what do they do? Sign a contract to agree to purchase $XT in compute over the next X years. It’s like buying an option - it’s a right, not an obligation to purchase.
If I were an investor and spent $10,000 to buy options to purchase $1,000,000 in Google stock, it’s not “$1,000,000 in hidden debt”
I very much hope this, and other threads on the financially insane behaviour of the tech sector get more surface. I don't think having this die in "new" is helpful because this stuff, the norms of how business looks at the balance sheet and decides what is, and is not rational business investment, this stuff is -> important <-
This is a significant proportion of the market. Having this amount of money not understood is harmful.
Not that I don’t agree with you in many ways, but if I was going to push back a little bit I’d ask you this:
Is this money not understood by the tech giants taking on the debt? I imagine they understand exactly what’s going on.
I think the way they see it is that it’s riskier for them to miss out on timing this investment.
The other question is “where else should they put their money?” Tech giants before the AI boom made a heck of a lot of cash that they had nothing they could do with it. Remember before AI when the existential crisis was stock buybacks? That was a bunch of companies who had so much profit that all they could think to do with it was buy their own stock back.
I am sure there will be a bubble pop, correction, general downturn, or something like that, but the question remains how much it’s actually going to matter. If AI blows up in Microsoft or Google’s face they’re just going to write it off and spend a decade paying zero income tax, or whatever other clever corporate accounting gets them out of that pickle.
> That was a bunch of companies who had so much profit that all they could think to do with it was buy their own stock back.
If you or your retirement is a shareholder in one of these companies, you'd rather they return $100 billion to you with boring buybacks or dividends than put it in an exciting AI investment that returns $1-$10 billion. Even though it didn't end up completely worthless, it's still a bad investment.
> If AI blows up in Microsoft or Google’s face they’re just going to write it off and spend a decade paying zero income tax
As a shareholder, you'd also rather they return $100 billion to you than put it in a bad investment that returns $0 -- even if that bad investment lets them write off $20 billion in taxes over the next 10 years you'd still be $80 billion better off.
> how much it’s actually going to matter. If AI blows up in Microsoft or Google’s face
An AI winter shouldn't be an existential threat to these companies -- but "the share price is 10% - 20% lower than the counterfactual where they didn't make these questionable investments" still represents a lot of lost wealth for shareholders -- billions (or trillions for the industry as a whole). A lot of that wealth is the hands of ordinary people, often through retirement investments in index funds.
> If you or your retirement is a shareholder in one of these companies, you'd rather they return $100 billion to you with boring buybacks or dividends than put it in an exciting AI investment that returns $1-$10 billion.
If you’re a retireer yeah you just want a steady dividend (or buyback).
But i mean for a 401k that won’t be spent from for 20+ years you absolutely want business to be investing into themselves. Otherwise go buy gold.
I think the way many of these companies see it is that the downside risk to not investing is that some of their verticals move into irrelevancy.
E.g., if Google doesn’t invest in AI then AI will kill their search engine business. A lot of us don’t love the Google search AI Overview but now they’re competing directly with ChatGPT, and they’re essentially not a search monopoly anymore.
One way to look at a bust AI investment is the destroyed value of the stock like you mentioned, but perhaps that’s somewhat hindsight-biased? Perhaps the reality for some companies is that if they sit on their hands and do nothing they lose 40% of their company value and if they spend a ton of money on AI they lose 20% of their company value. Of course we don’t know the outcome yet.
I think the that they feel the need to do these off balance sheet shenanigans is the issue. They're obviously extremely worried that their credit rating is going to be downgraded otherwise, why bother?
The company budgets cannot sustain this. Behemoths like Google and Amazon with insane balance sheets are now on their knees begging for loans.
We (as a country) should contain our exposure to this insanity. If companies want to go bankrupt let them go, but we cannot strangle the liquidity of the entire market to feed the ambitions of these handful of companies.
This is quite misleading. It includes numbers for commitments for leases of data centers and payments for power that are decades into the future.
Even if AI completely busts and all of these servers are worthless that doesn't mean the data centers are. There's still a need for data centers to host non-AI servers. The hyperscalers will close/sell other data centers and serve from places where they have long term commitments at.
3.2 trillion sounds like a lot until you spread it over 20 years and half a dozen trillion+ dollar companies. It's hard to tell how much a bag they're holding but it's almost certainly negligible compared to revenue and market cap. The only real systemic risk is the risk of for some reason not needing any data centers.
It depends. For Anthropic half of the $900b is going to be incurred by the end of 2030. There's definitely risk.
As I've been pointing out a little bit recently -- the 'downside' scenario -- somehow we conclude we have enough inference at our world's desired quality and therefore demand stabilizes below that of these datacenters -- would be GREAT for the world. Super cheap intelligence for all.
If some lenders go bankrupt on a datacenter note post-buildout and the capital structure is reworked, lowering the costs by removing capitalization costs from the cashflow of the inference provider, that is all to the good of people who did not do the initial lending.
I think that is extremely unlikely, but it's good for datacenter doomers to think through these scenarios IMO.
Your take seems a bit optimistic if we use the dot-com boom as an analogy. The dot-com boom sped up a massive infrastructure build-out, but also left damage that lasted for a very long time, with many organizations collapsing, and others taking a very long time to recover (e.g. cisco networks). It also seems that these 'data-centers' have a higher depreciation rate than 'dark-fiber' did post-dot-com, which means that there is likely to be greater capital waste.
I am not sure whether the dot-com boom was a net-positive, and the AI boom may be less productive.
It absolutely was a net positive. On the infrastructure side we got datacenters built and tons of dark fiber put down. At the start of the boom we had only 2G cellular for goodness sake. I think you could argue we wouldn't have necessarily had the rise in cloud compute without some of the 'overbuilding' of datacenters in web 1.
For reference this 'massive build-out' resulted in, according to a Berkeley study I found, 500MW of total datacenter power in the US across 320 locations at end of 2020. This wasn't "too much for very long:" as of 2005, according to Tier1 there were 511 datacenters. And it was likely only really a year or two: Dupont's VA3 utilization numbers published it at 50% utilization in 2003, 89.4% in 2004, then full thereafter.
Meanwhile, these infrastructure improvements allowed, for example, things like the iPhone to be built and deployable -- there was 3g, there were a LOT more web devs that could create the early (web only) apps the iPhone needed to compete. This in turn allowed another round of investment to be built on top of all of that.
On the capital side, investors were also able to buy Amazon at around $1 / share. AAPL at iPhone launch was $7/share. I haven't split adjusted either of these, this is just from memory.
I don't think a bust was necessarily good but the boom undeniably built out infrastructure, a small fraction of what the world is currently using, and did it pretty quickly, and then post bust that infra got bought out in a capital efficient manner. I think that's the bear case here.
Cisco networks took a very long time to recover, but in the meantime, everyone else enjoyed massive growth in cheap connectivity.
Capital waste is only capital waste if the physical goods that were built are no longer useful for anyone. Otherwise, it's only a waste for the people who lent money.
It really depends on the "somehow". The most realistic downside scenario, it seems to me, is that most people don't care too much about super cheap intelligence for all because there ends up being another bottleneck for most of the things we value.
Like, trains are an incredible technology which transformed the world, but very few people go around counting their lucky stars that they live in a world that permits such wonders. It's a train, it gets things where they need to go, and by the way isn't it so annoying that sometimes it doesn't quite arrive when the schedule said it would?
Sounds like you live in Europe! Bring me more trains pls
what do you think debt is? what you've described as misleading, is debt by definition.
I didn't say it wasn't debt. I said it was 20 years worth of spend on something they need regardless of what happens with AI.
It is, by definition, NOT debt. With debt, you are given a lump sum of money. These are spending contracts, but any contract has the ability to be gotten out of, unless your lawyers are very stupid.
All these special purpose off balance sheet things always smelled bad to me. Here’s hoping it blows up and takes all of it down 50 percent or more. Heck go 99% down. I’ll buy everything I can get my hands on.
I do wonder why HN thinks it understands risk better than the people hired at multi trillion dollar companies whose whole sole job it is to understand and minimize these risks - people who also understand the company way better than anyone on HN.
Is it possible that these companies feel they have more to lose by missing out on AI than by taking on debt? Or that they genuinely are in a race to superintelligence, which easily justifies this debt and far more?
When I worked at Apple, I remember seeing the commentariat insisting that <project> was bound to fail, that we didn't know what we were doing. When in fact extremely competent people knew precisely what they were doing. Of course, the commentariat were wrong and I'd wager most of them use what I had a part in building. The same story tended to repeat across my subsequent jobs in big tech. All this seems quite similar to me.
The FOMO argument is exactly what was used by banks in GFC: as long as the music is playing need to dance.
But current era also has echoes of capex financing (eg cisco lending to its buyers) and Enron (eg use of SPVs).
I don’t think that most people who are concerned about a bubble think people and orgs fueling it are stupid, but they’re operating with local incentive structures that can result is systematic problems.
And for folks who have lived through multiple of these (and maybe lost paper wealth, retirement savings, or homes), I think being concerned is reasonable.
Hard won lessons and all that.
They might have a conflict of interest so that they shouldn't be trusted implicitly even if they can theoretically do a better job. Also, we live in a democracy, and these are public companies. With that much money on the line, they become quasi-governmental in shaping the economy and such. If they don't like public scrutiny, probably best not to be a public company. The workings of a public company should probably be a public interest, so the public can support laws and regulations appropriate for them
The world is run by completely average people making series of mundane decisions. There is no super genius who’s job it is to understanding the risk of investing in AI.
It’s just some nameless regular guy crunching some numbers and feeding to another regular guy who interprets the numbers. And so on
Does this thinking apply to tech's VR bet, for example?
too soon! T_T
HN has devolved considerably. It is practically general Reddit-tier kneejerk contrarianism now. I'm getting literal "Cool story bud" replies to me within the last day.
Year after year of the advent of LLM's has repeatedly shown HN overall consensus gettings things wrong again and again. AI lab employees aren't here they're on Twitter/lesswrong. 6 months ago Mythos was announced and it has been an absolute deluge of "it's just marketing stunts." Practically 75% of many threads had that take. Strange, we don't hear much about that anymore, now that the plethora of hacks has taken place and increasing. There will be no mea culpa, just moving on to the next kneejerk dismissal as peoples' subconscious fearfully grapples with our immediate future. They want the AI boom to fail, because the implications of what happens next when it doesn't fail is unknown and vaguely frightening to them, for now.
Smartest guys in the room
HN? Are you talking about KOHEI YAMADA at Nikkei?
OR they think it is a no lose situation. (aka the US Govt will step in and buy their debt if they falter, aka privatize the profits, socialize the losses)