AI mania can’t survive higher interest rates

The writer is chair of Rockefeller International. His latest book is ‘What Went Wrong with Capitalism’

When bond yields surged in recent months, analysts just shrugged, saying the AI boom would thrive regardless. This is classic bubble logic. The price of money always matters, and there is good reason to believe that is true now more than ever.

Global debt is at record levels, much of it accumulating on government books. This is good news short term (governments are typically the last fortress to fall) but bad news in the end (governments will be in no position to deliver stimulus or bailouts). The pool of available capital is more limited than it was in the booms of the late 1990s and 2000s, because this time companies must compete with governments for money.

That sets the stage for a rapid liquidity squeeze. Steeper rates threaten to trap corporations between higher borrowing costs and increasingly wary lenders. As big tech groups turn from cash to debt to fund their multitrillion-dollar data centre build-out, AI-related debt issuance is likely to exceed $600bn in 2026, up 10-fold from 2024.

While interest rates were arguably at similar levels during the 1990s boom, the story arc was very different. Rates today aren’t just high, they’ve risen rapidly in a short period, after nearly 25 years of historically low rates that trained investors to expect endlessly easy money. A dramatic regime change like this one is bound to cause financial stress. Already cracks are appearing, as investors demand much higher yields to finance the weakest borrowers in the AI supply chain.

Most investors nonetheless find ways to take comfort amid these tremors. The US stock market looks resilient; default rates remain low. Plenty of credit is still available to fund the frantic AI build-out. But the end of a boom is a process, not a point in time. It takes a while for higher rates to have a systemic impact.

Consider the busts of 2000 and 2008. High rates did eventually deflate those bubbles, affecting the weakest sectors before reaching the broader market and the economy. This process unfolded over several years. Tech stocks took a first big step down in early 2000, but many investors were still piling into tech funds late that year; the bubbly enthusiasm didn’t die out till 2001.

Magical thinking flourishes in a bubble’s final stages. One central myth of the dotcom era was that “enormous” demand for internet products had freed tech firms from ordinary economic forces, such as interest rates. Before 2008, analysts tried to make the case that “rising rates don’t burst bubbles”, or would merely slow not reverse gains in home and share prices, or would not touch stocks at all because corporate profits were “the best in 30 years”.

Eerily similar claims can be heard today for AI. Optimists have argued that a few percentage points of interest won’t mean much to companies facing historic gains in value. Or that Fed rate rises measured in mere basis points can’t lower the spending ambition of companies trying to win the AI arms race. Now that higher rates are in fact hitting AI subsectors such as neoclouds, they brush off the notion that a few tens of billions in debt could take the AI complex down.

It would be a wonder if these dismissals prove correct, since every major boom of the past three centuries has ended amid tightening financial conditions. And contagions can spring from obscure corners of the market; the global crisis of 2008 started in US subprime mortgage debt.

Finding scenarios that would reverse this process of erosion caused by higher rates requires more magical thinking. AI could generate a huge boost to productivity, which comes so rapidly that the economy takes off. As a result, debt to GDP declines, interest rates come down and all the spending pays off in massive revenues for AI companies.

These blue-sky projections overlook a new vulnerability. Unlike past booms, including the late 1990s, money pouring into tech is not lifting other sectors: outside AI, borrowing is weak and investment is falling. It is difficult to see how AI companies can thrive when so many of their potential customers are struggling.

The mania for AI stocks has frayed in recent weeks as higher rates have begun to strain credit markets. Investors are becoming more discerning in how they allocate capital, a point that will be driven home anew if US interest rates resume their climb, which is likely given the ever-rising borrowing needs of the government and AI firms. This may be the most transformative tech boom yet, but it’s not big enough to defy the high price of money.