According to Fortune, top economist Mohamed El-Erian warned at Yahoo! Finance Invest that the AI bubble will “end in tears” despite being what he calls a “rational bubble.” He differentiated between credit “cockroaches” – unpleasant accidents that don’t threaten system integrity – and more dangerous “termites” that erode foundations. While working with Nobel Laureate Mike Spence, El-Erian concluded investors are taking a venture capital approach and “overinvesting” due to AI’s potential payoff, mirroring past speculative periods like the dot-com era. He expressed concern about inadequate U.S. policy on AI diffusion into workplaces and noted lower-income consumers are “near recession” with maxed-out credit cards and affordability concerns that could “contaminate upwards” through the entire economy.
The Rational Bubble Reality
Here’s what’s fascinating about El-Erian’s “rational bubble” framing. It’s not that AI is worthless – far from it. The technology genuinely creates massive value. But when everyone piles in because they’re afraid of missing out, you get this weird situation where overinvestment actually makes sense mathematically. Basically, the potential payoff is so enormous that it justifies what would normally be reckless behavior.
And we’ve seen this movie before. Remember the dot-com era when every company suddenly became an “internet” business? Now it’s the AI label. Foundational model companies are attracting insane investment, but let’s be real – not all of them are going to make it. The question isn’t whether there will be winners, but how many losers we’ll see along the way.
The Diffusion Dilemma
El-Erian hits on something crucial that doesn’t get enough attention: diffusion. We’re so focused on building AI that we’re not thinking enough about deploying it effectively. China and the UAE have comprehensive diffusion policies, while the U.S. is basically winging it. That’s a problem.
And corporate America isn’t helping. Most companies see AI as a cost-cutting tool rather than a productivity multiplier. But here’s the thing – if we get diffusion right, the productivity gains could be so massive that they’d actually let the Fed keep rates lower. We’re talking about changing the entire economic equation.
Cockroaches vs Termites
El-Erian’s insect analogy is actually brilliant. Cockroaches are those credit accidents that pop up but don’t collapse the system. We’re seeing them because everyone stretched for yield during years of easy money. People went beyond their comfort zones and due diligence capabilities.
But the real danger? That would be termites – the slow, silent destroyers that eat away at foundations. Right now, El-Erian doesn’t see termites, which is comforting. But with massive debt refinancing coming due at higher rates, could some cockroaches eventually attract termites? It’s worth watching.
K-Shaped Pressure Cooker
This is where it gets really concerning. Lower-income households are essentially in recession territory already. Maxed-out credit cards, affordability crises, job insecurity – it’s a perfect storm. And El-Erian makes the crucial point that this isn’t just an economic issue. It’s social and political.
The scary part? He says this pressure will “contaminate upwards.” Even the wealthy can’t completely insulate themselves if the bottom falls out of consumer spending. We’re living in a multimodal world, not the nice bell curve economists love. The tails matter more than ever, and one tail is looking pretty frayed.
