Editor’s note: Today’s the final essay in a multi-part series on how the massive spending into the AI buildout will play out over the economy and for the companies involved. Please see the first essay here, the second essay here, the third essay here, the fourth essay here, and the fifth essay here.

Here’s Porter now…

How do I know the funding and the buildout won’t continue? Because this entire bubble was never about technology. The bubble around the artificial intelligence (“AI”) buildout was caused, like all financial bubbles, by a corruption of the money supply.

The railroad boom of 1865-1873 was fueled by the paper money of the Civil War. The telecom bubble of 2000 was fueled by the Federal Reserve’s response to the Russian default and fears about Y2K. And, of course, the mortgage bubble of 2008 was fueled by the Fed’s aggressive response to 9/11 and the “War on Terror.”

The AI bubble is a direct result of the Federal Reserve’s response to COVID. Our central bank created an unimaginable amount of new money – roughly $7 trillion.

By late 2021, the money market funds that received most of this cash couldn’t find enough safe, short-term places to put it. So the Fed opened up what amounts to a giant parking lot for cash. It’s called the reverse repo facility (“RRP”).

Don’t let the jargon fool you. This is simply the government printing money and handing it out to favored financial institutions.

Technically, it works by a money market fund depositing its cash to the Fed overnight. (Note: there’s no reason the Fed, which can create as much cash as it wants, would ever need to borrow money from a money market fund.) The Fed then gives the fund a Treasury security as collateral for the night. The next morning the Fed gives the cash back plus a tiny amount of interest. It’s called “reverse repo” because from the Fed’s point of view it’s the reverse of a normal repo – the Fed is borrowing the cash rather than lending it. Once again – as with neocloud, which I wrote about on Monday – when something is called a made-up word that has no actual meaning in the English language, beware.

With the Fed handing out money for nothing, it was no surprise that the RRP “parking lot” filled up fast. At its peak in December 2022, the RRP held about $2.5 trillion in money market fund cash.

And that money is what has been powering the entire AI bubble.

Let me show you what happened.