Summary of Key Points
Recently, the South Korean stock market has experienced a collapse due to the bursting of a bubble fueled by AI-related speculation. In just over a month, the stock index plummeted by nearly 30%, resulting in numerous retail investors who used leverage being forced to sell their stocks (forced liquidation), and some even committing suicide. This decline has triggered a chain reaction across global AI and semiconductor stocks (with U.S. memory chip stocks falling by more than 40%). Behind this event lies a critical juncture in the global narrative of AI investment: while AI itself has the potential to enhance efficiency and is not a bubble, asset prices have been inflated beyond their intrinsic value. The narrowing gap between Chinese and American AI models challenges U.S. dominance, and despite attempts by the U.S. to protect domestic companies through policy, this long-term trend cannot be halted. The development of AI also poses a dilemma for the Federal Reserve's monetary policy, which may be swept up in market fervor.
1. South Korean Stock Market Crash: From a "Golden Age" Joke to a Disaster for Retail Investors
A joke that went viral online became a sign of the peak of the AI bubble: A newly graduated South Korean woman earned several years' worth of money from trading stocks and reminisced about the "golden age" of the stock market. However, after the joke spread like wildfire, the South Korean stock market experienced multiple circuit breakers. Within just over a month, the index dropped from 9,385 to 6,755 (a nearly 30% decline). Retail investors who borrowed money to trade stocks (using leverage) faced dire consequences—one in ten were required to replenish their margin, and those who failed to do so had their stocks sold off by the securities companies. Some could not bear it and committed suicide, while others attacked bloggers who recommended stock investments. Even worse, the impact of this crash extended globally, with U.S. memory chip stocks (essential for AI applications) falling by more than 40%, demonstrating the extent of the AI-related speculation.
2. The "Story" of AI Investment: The Foundations and the Limits of the Bubble
AI has gained momentum thanks to three main factors:
- Real Practicality: AI can indeed help with tasks such as coding and creating short videos, improving efficiency.
- Exciting Narratives: Leaders of companies like OpenAI describe their new models as having the power to " Witness an atomic bomb explosion," exaggerating their potential impact on the future.
- Massive Investment: Large corporations like Google and Facebook have invested all their profits and even borrowed money to fund AI initiatives, driving soaring performance across the entire industry chain.
But where lies the bubble? While AI capabilities continue to improve, the potential for future profits has been overstated. The gap between Chinese and American AI models is narrowing (with Chinese open-source models becoming increasingly powerful), threatening the U.S.'s monopoly. The billions invested in AI will need to be re-evaluated—similar to the dot-com bubble of 2000, where stock prices collapsed, yet the internet continued to transform the world. AI itself is not a bubble; it's the inflated stock prices that are.
3. China-U.S. AI Competition: U.S. Attempts to Halt the Long-Term Trend
The gap between Chinese open-source AI models (which are free, affordable, and easy to use) and American proprietary models (such as ChatGPT, which are expensive and closed-source) is narrowing. The U.S. is anxious, with Silicon Valley investors calling for government intervention, and the Treasury Secretary suggesting banning or sanctioning Chinese AI models. The U.S. is trying a combination of incentives and threats: offering government contracts to domestic companies and using legal measures to force American firms to avoid using Chinese models.
However, these tactics are unlikely to be effective in the long run:
- Capital Seeking Profit: The significant price difference between Chinese models and American proprietary models will attract capital arbitrage (e.g., by outsourcing to companies that use Chinese models or rebranding Chinese models as American products).
- China's Rapid Progress: Even with a U.S. chip embargo, China's semiconductor hardware and AI research and development continue to advance, further narrowing the gap between the two countries.
4. AI Creates a Dilemma for the Federal Reserve
The development of AI has put the new Federal Reserve chairman, Jerome Powell, in a difficult position:
- Extreme Scenario 1: If AI truly becomes as powerful as claimed and replaces 90% of white-collar jobs, it could lead to widespread unemployment and economic recession.
- Extreme Scenario 2: If AI does not prove as effective as expected, the massive investments in AI will be in vain, leading to a bubble burst in AI-related stocks and another economic downturn.
In either case, an economic recession is possible. Powell finds himself in a similar situation to Alan Greenspan in 1996, who warned about the "irrational exuberance" of the internet bubble but was unable to prevent its collapse. Now, he is caught in the midst of market fervor and can only continue with loose monetary policies (such as printing money or cutting interest rates) to avoid a worse economic outcome if the stock market crashes.
5. Conclusion: The Bursting of the AI Bubble Is a Warning, but the Long-Term Trend Remains Unchanged
The South Korean stock market crash serves as a warning of an AI-related asset bubble. While AI represents the future, inflated stock prices must return to reality. The competition between China and the U.S. in AI will continue, but U.S. protectionist measures cannot stop China's progress. The Federal Reserve's monetary policy will also be influenced by the uncertainties surrounding AI development. Ordinary investors should remember not to be misled by optimistic rhetoric and remain vigilant against bubbles in their investments.