Circular Financing in AI: Nvidia’s Lucent Problem

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 Lucent parallel is particularly instructive because it shows how circular financing can inflate a stock to extraordinary heights before the collapse. Lucent went from a small spin-off to the most widely held stock in America, with almost 5 million shareholders. It became the largest telecom company in the world. Then the Minsky Moment hit, and Lucent plummeted from $75 to $0.76.

Similar schemes operated at Nortel, which fell from over $8,000 to around $50, and Cisco, which collapsed from $50 to $8. Each company used vendor financing to inflate revenue, booked the full sale as revenue upfront, and created a feedback loop that made the business look healthier than it was.

The scale of today’s circular financing is what concerns Rickards most. Grace Blakeley noted that the amounts being pumped into AI infrastructure dwarf the amounts that were spent laying down fiber optic cables in the 1990s. Nvidia has become one of America’s most widely held stocks, just as Lucent was. Michael Burry has called Nvidia the Cisco of the AI boom and said this bubble is too big to save.

Rickards emphasizes that the circular financing problem is not an isolated issue but a systemic one. Blakeley, author and former Research Fellow at the Institute of Public Policy Research, described the full scope: “The last time we saw anything like this level of circularity in the tech sector was the dot-com bubble. The AI infrastructure boom parallels the telecom equipment companies such as Lucent and Nortel that advanced money to customers in the 1990s to buy equipment, only for everyone to go bankrupt later. This artificial arrangement creates the illusion of stronger demand for both companies’ services. The big difference this time is scale. The amounts being pumped into AI infrastructure dwarf the amounts that were spent laying down fiber optic cables.” The comparison to the dotcom era is direct: internet companies spent nearly half a trillion dollars on infrastructure and installed 80 million miles of fiber optic cable, enough to circumscribe the globe over 3,200 times. Eventually, 85% of those cables went unused. Nvidia is now playing the role Lucent once played, and the amounts involved are orders of magnitude larger.

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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.

See our analysis of subprime AI debt for how data center bonds echo 2008.

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