Fears of financial contagion are growing as the Bank of England warns of the dual risks of a bursting artificial intelligence bubble and political instability in the United States. The bank’s Financial Policy Committee (FPC) said the “risk of a sharp market correction has increased,” with significant potential for “global spillovers.”
The primary domestic risk identified is the “stretched” valuation of tech companies focused on AI. Optimism has propelled firms like OpenAI and Anthropic to valuations of $500 billion and $170 billion, respectively. The FPC cautioned this leaves markets highly susceptible to a crash if the hype around AI dissipates.
The basis for the hype is being challenged by data showing a lack of immediate profitability. A recent MIT study found that 95% of businesses have seen zero return on their generative AI investments. This suggests a speculative bubble that could burst, triggering a wider economic downturn as financing dries up.
The international risk is centered on the US Federal Reserve. The FPC is concerned by Donald Trump’s ongoing rhetoric that threatens the central bank’s independence. This political pressure could erode the Fed’s credibility, a critical anchor for the global financial system.
The Bank warned that a loss of faith in the Fed could provoke a “sharp repricing of US dollar assets,” unleashing turmoil across international markets. For the UK, the FPC concluded that the risk of contagion from these shocks is “material,” posing a direct threat to the nation’s economic health and stability.