The AI Minsky Moment: How Bubbles Collapse

The Minsky Moment framework, named after Harvard economist Hyman Minsky, describes how bubbles collapse in four phases. First, the hedge finance phase, where companies take on debt they can repay from cash flows. Second, the speculative phase, where companies take on more debt than earnings can cover. Third, the Ponzi phase, where companies need new investors just to service existing debt. Finally, the Minsky Moment itself: the culminating event when investors finally catch on and the market suffers a massive collapse.

Rickards maps this framework directly to the current AI boom. He points out that the dotcom bubble followed the same pattern before the Nasdaq plummeted nearly 80%. The 2008 financial crisis followed it before the market fell close to 60%. The Great Depression of 1929 followed it as well. His argument is that AI is now in the Ponzi phase, and the Minsky Moment is imminent.

Rickards identifies three historical Minsky Moments that followed this exact pattern. The dotcom bubble burst in 2000, when the Nasdaq plummeted almost 80%. The 2008 financial crisis, when the market fell close to 60% and millions of people watched their retirement accounts go up in flames. The Great Depression of 1929. In each case, the Minsky Moment took everyone by surprise.

Rickards pinpoints August 26th as the date the final domino could drop. This is when AI companies like Nvidia, Meta, and Coreweave release their earnings statements. He argues that a single earnings miss could be the pin that pricks the bubble. He draws a historical parallel to March 20, 2000, when Barron’s published an article called Burning Up warning that at least 50 dotcom companies would run out of money within 12 months. Within a week, stocks began to crater. Pets.com, which had IPO’d just one month earlier, plummeted 67% within a month and was bankrupt within nine months.

Rickards also points to September 28, 2007, when NetBank collapsed, marking the beginning of the subprime mortgage cascade. The Minsky Moment always takes everyone by surprise, he says. One day the market is beginning to soar. The next day, a single sobering report comes out and reality sets in.

Rickards introduces the concept of extrapolation bias to explain why most investors will miss the coming crash. People believe that because something has happened in the recent past, it is likely or even inevitable that it will continue happening in the future. This psychological trap makes even the highest IQ people deny a pending disaster, no matter how obvious the danger may be.

Rickards references his experience negotiating the LTCM bailout, where Nobel Prize winners with 150+ IQs managed a fund built on models that assumed the future would look like the past. Those models nearly blew up the entire U.S. economy. Myron Scholes, who developed the Black-Scholes Pricing Model that won a Nobel Prize, was among them. The lesson: intelligence does not immunize against extrapolation bias.

The structural forces behind Rickards’ Minsky Moment argument are real and well-documented. The scale of the AI bubble is staggering. Rickards cites JP Morgan’s Chair of Investment Strategy, who noted that three-quarters of gains in the S&P 500 since the launch of ChatGPT came from AI-related stocks. Without those AI-driven gains, the S&P 500 would be worth roughly half what it is today. AI expenditures accounted for 92% of GDP growth, meaning AI-related spending now contributes more to the nation’s GDP growth than all consumer spending combined.

Nvidia, which designs the advanced chips at the heart of the AI boom, became the first company in history worth $5 trillion. That single stock represents almost 20% of all U.S. GDP. As Rickards points out, Nvidia does not even manufacture its own chips. Taiwan Semiconductor and other manufacturers build them. Nvidia just draws up the designs.

Rickards draws a direct parallel between today’s AI companies and Lucent Technologies during the dotcom bubble. Lucent aggressively lent billions to cash-strapped customers to buy its equipment, booked the full sale as revenue upfront, and created what Rickards calls a feedback loop that cooked their books. The more money Lucent borrowed, the more it could loan out, the more it got back in revenue, and the more it could borrow. This is known as circular financing.

Today, Rickards argues, Nvidia is investing money in startups that then buy Nvidia’s chips. OpenAI invests in Oracle’s data center buildouts, which then use the money to invest back in OpenAI. Grace Blakeley, a research fellow, called Nvidia the central bank of AI and the lender of last resort. Michael Burry, the investor who predicted the 2008 subprime crash, has called Nvidia the Cisco of the AI boom and said this bubble is too big to save. Lucent ultimately fell from $75 to $0.76. Nortel fell from over $8,000 to around $50. Cisco collapsed from $50 to $8.

The AI Black Paper presentation promotes Strategic Intelligence, Rickards’ monthly newsletter from Paradigm Press. The price is $49 for 6 months, originally $299, an 83% discount that works out to about $8 per month. The guarantee is 3 months: subscribers can request a full refund for any reason within that window and keep all reports.

The package includes six months of Strategic Intelligence plus six special reports: AI Fallout (the biggest AI losers to remove from your portfolio immediately), The AI Black Paper Blueprint (his personal million-dollar roadmap), AI Meltdown Insurance (how to profit from the coming crash), Trump’s AI Arsenal (how investing in AI superweapons could turn $1,000 into $162,000), The Perfect Physical Gold Portfolio, and How to Make Your Home Your Personal Fortress.

Where to Learn More

For the complete analysis, read our AI Black Paper review covering Jim Rickards’ full thesis on the AI Minsky Moment.

For a deeper dive into the bubble thesis, see our analysis of AI bubble warning signs.

Read our deep dive on circular financing in AI for the full Lucent comparison.

Ready to explore Jim Rickards’ full research? Learn more about Strategic Intelligence here.

This is not financial advice. Always do your own research before investing.