Amid a relentless surge in capital directed toward artificial intelligence ventures, former Treasury Secretary Robert Rubin has sounded a note of caution. Speaking at the Greenwich Economic Forum, Rubin highlighted that while the AI boom promises sizable productivity gains, it also carries hidden financial and societal hazards that market participants may be overlooking.
Rubin’s central thesis revolves around a phenomenon he terms circularity risk. In his view, the rapid expansion of AI projects creates a tangled web of obligations linking chip manufacturers, software developers, cloud-service providers, and the investors financing them. When these interlocking promises fail to materialize, the fallout could cascade through the entire ecosystem.
Circularity risk in the AI ecosystem
The former Treasury chief explained that many large AI firms have entered into massive supply contracts, often borrowing against the anticipated revenue from those deals. Circularity risk describes the danger that, if a pivotal participant cannot meet its obligations, the financial exposure of every related party balloons, potentially triggering a chain reaction of defaults. Rubin cited the relationship between semiconductor producers and AI software firms as a prime example, where both sides have pledged sizable deliveries that are now entangled with borrowed capital.
“Some of these very big AI companies have enormous commitments, and then there are a lot of suppliers, and a lot of suppliers have borrowed against those commitments,” Rubin said. “What happens if they can’t fulfill those commitments or all those borrowed against them? It’s called circularity risk.” He stressed that the probability of such a systemic break is far from negligible.
Debt accumulation and rising borrowing costs
The scale of financing required to erect new data centers and develop sophisticated AI algorithms has been extraordinary this year. Companies are issuing debt at a pace that many analysts believe is contributing to a broader increase in global borrowing costs. Benchmark sovereign yields have reacted sharply, with the 10-year U.S. Treasury rate climbing to its highest level since 2002, a signal that investors are demanding higher premiums for risk.
Fiscal implications for the United States and Europe
Higher sovereign yields translate directly into larger debt-service burdens for governments. Rubin warned that this dynamic is beginning to erode confidence in the fiscal health of the United States, France, and other major economies. “I think what’s happening right now is some realization about our fiscal situation beginning to affect markets in a way it hasn’t for a long time,” he observed, echoing concerns that first emerged during the Clinton administration.
Beyond the raw numbers, Rubin highlighted a broader erosion of trust in public institutions. Persistent inflation, coupled with mounting deficits, fuels a perception that governments may struggle to manage the mounting debt load, further destabilizing markets.
Market perception and future outlook
According to Rubin, the market may be under-pricing the blend of AI-related circularity risk and the fiscal strain induced by soaring debt issuance. He warned that investors who ignore these interconnected hazards could face sudden corrections if a major AI contract defaults or if sovereign borrowing costs accelerate further.
Ignoring the intertwined obligations that bind the ecosystem could unleash a cascade of defaults, intensify fiscal pressures, and ultimately dampen the very productivity surge that the sector seeks to deliver.
