The California Gold Rush left an outsized imprint on America. Some 300,000 people flocked there from 1848 to 1955, from as far away as the Ottoman Empire. Prospectors massacred Indigenous people to take the gold from their lands in the Sierra Nevada mountains. And they boosted the economies of nearby states and faraway countries from whence they bought their supplies.
Gold provided the motivation for California – a former Mexican territory then controlled by the US military – to become a state with laws of its own. And yet, few “49ers” as prospectors were known, struck it rich. It was the merchants selling prospectors food and shovels who made the money. One, a Bavarian immigrant named Levi Strauss who sold denim overalls to the gold bugs passing through San Francisco, may be the most remembered figure of his day.
California is going through another investment rush these days. This time it’s centered in Silicon Valley. The pot of gold is more elusive but potentially much bigger: Artificial Intelligence. What this rush leaves in its wake will shape the long-term future of civilization – or maybe not?
The question everyone seems to be asking is: is AI a bubble? Lots of people seem to think so, including Open AI’s Sam Altman and the Bank of England. How else to explain Nvidia’s stock price, which more than doubled from April to November, based entirely on the expectation, nay hope, that AI will produce a super-intelligence that can do everything humans do but better.
Nvidia – like Levi Strauss back in the day – is at least selling something: computer chips. The valuations of many of the other AI plays – like Open AI or Anthropic – are based largely on the dream.
The big analytical challenge, however, is to figure out what kind of bubble this is. Is it the kind that will ravage the economy when it bursts? What will it leave of value once it pops?
Bubbles all share one characteristic – besotted investors in pursuit of a dream. But they come in many flavors. Not 20 years ago, we suffered the housing bubble, when home prices rose to stratospheric heights and almost brought down the financial system as they crashed back to earth. Less than a decade earlier, it was the dot-com bubble that burst, when investors realized that Webvan, Pets.com and the like were not worth billions just because they used the Internet.
A few years before that we witnessed the rise and collapse of the East Asian bubble – with ancillary bubblettes in Russia and Brazil – when money rushed into these emerging markets, freaked and rushed out. There was the Tequila Crisis, which pummeled the Mexican peso and its economy. And the Japanese bubble, when the value of the Nikkei 225 stock index tripled over four years before it fell by 60% over the next two and a half.
Bubbles have plagued the world’s finances at least since the 17th century, when Dutch investors fell in and out of love with tulips. In the 18th century, French, Dutch and British investors…
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