S1: There's a battle brewing over which country will come out
S1: as the leader in AI, and the United States is
S1: betting the House economically that it will come out on top.
S1: I'm Samantha Selinger Morse, and you're listening to The Morning
S1: Edition from The Age and the Sydney Morning Herald. Today,
S1: international and political editor Peter Hartcher on what previous infrastructure
S1: booms like the craze for building railways in the 1840s,
S1: or the.com boom of the 1990s, tells us where this
S1: will lead economically and which countries might be hit hardest
S1: in an AI bust. It's August the 6th. Peter, welcome
S1: back to the podcast.
S2: Pleasure, Samantha.
S1: Okay. I'm so looking forward to this because many of us,
S1: we think of AI, we think of maybe our mate
S1: who's using it to craft a wedding speech, or perhaps
S1: some of our friends who use it to, you know,
S1: cheat at uni on on essays. But you've pointed out
S1: in your most recent column, it's actually sort of the
S1: cornerstone or it will be of any country's given power.
S1: So just remind us, how is that?
S2: Well, the threshold question really is, do you want to
S2: be a country in control of its own fate or
S2: a country that is at the whim of other countries
S2: that have greater technological advantage than you do? You could
S2: use a parallel going back to the times of imperialism
S2: and colonialism, the countries that had the technological edge of
S2: being part of the early part of the industrial revolution
S2: were the countries that took over all the other countries.
S2: So AI is a new level of capability now, which
S2: will be not not all, but one of the distinguishing
S2: factors between countries that can control their own destiny and
S2: sovereignty and the countries that can't. That's the core proposition.
S1: Okay. No small, no small thing. But there's also the potential,
S1: and you've written about this to unleash major chaos, right?
S1: Which as part of, I guess, your ability or a
S1: country's ability to take over possibly another country. So I
S1: guess tell us about that, whether in the context or not,
S1: of maybe recent AI launches or just what the capacity
S1: is at the moment or what it will be.
S2: Yeah. Well, to create chaos, I mean, absolutely, countries can
S2: already do that using warfare, kinetic warfare. This is a
S2: new type of chaos. And we've had a we've had
S2: a fair flavor of it through. One example is cyber
S2: attacks and, you know, great outages, failures online. This AI
S2: takes this stuff to a new level. In fact, a
S2: couple of weeks ago, I quoted the former head of
S2: the Australian Signals Directorate, the. The ASD is a highly
S2: sophisticated secret signals interception and Surveillance agency. It's, I suppose,
S2: the equivalent of America's NSA, National Security Agency. Rachel Noble
S2: Rachel said to me that, um, she said, this is
S2: already totally, uh, operating in our systems. We're already completely
S2: dependent on it. Everything from space, GPS, cyber security, she said,
S2: for example, we're going to need it to defend against
S2: other countries, she said. Already, we know ASD has put
S2: out advisories that they have detected Chinese malware implanted throughout
S2: critical infrastructure systems and sites in Australia. Very hard to
S2: detect inactive. We need to be able better to to
S2: track it. This is what she told me. And she
S2: was a top signal spy for the country. And AI
S2: gives China greater capacity to do more, uh, to potentially
S2: disrupt other countries. And as Rachel Noble said, this malware
S2: sits on your system until, the hostile state decides it's
S2: the moment they want to activate it. Push the button
S2: and knock out all your systems. She said. We need
S2: a better capacity to detect it, and our enemies will
S2: want a better capacity to inflict it. So it's really
S2: basic nation state, uh, state on state warfare in a
S2: new dimension. It's geopolitics by other means.
S1: And we're already seeing it, I believe. There's been reports
S1: that the United States military reportedly used Claude, I think
S1: AI built by anthropic in the bombing of Iran and
S1: before that, the Venezuela raid in January. So and further
S1: to that, you've written that the US is betting its
S1: economic house on AI. So what do you mean by that?
S2: Yeah. Well, part one of your question, uh, a famous
S2: professor of international relations, Hal Brands, has has written that
S2: all wars are AI wars from now on. And already
S2: we see examples, as you say. It doesn't mean that
S2: because you have AI, you'll win the war. Like with
S2: any type of power, you have to deploy it intelligently
S2: in pursuit of a sound strategy. If you I mean,
S2: take the case of the US, we've talked about this extensively,
S2: but the US against Iran doesn't matter how much raw
S2: power it has in pursuit of a stupid strategy, it
S2: will fail. So you still need to have good strategy.
S2: But if you have two countries with equal strategy and capability,
S2: AI is a potential source of advantage in all countries,
S2: of course, will want that advantage. As for the Americans
S2: getting their economic house on AI, there's a few ways
S2: you can slice this particular salami. One way is that
S2: the huge surge of investment to set up the infrastructure
S2: for this industry is responsible for, depending on the month, um,
S2: most economic growth in the US or down to about
S2: a third of economic growth in the US. So this
S2: is just one industry. Just think of the size of
S2: that economy and all the industries across the whole thing.
S2: And this one sector is accounting for between a third
S2: and and two thirds or more of US growth in
S2: any given month or quarter. That's that's one dimension. Another
S2: dimension is look at the stock market. And this is
S2: where it gets out of control. So the the actual
S2: hard investment in systems and data centers and chips and
S2: all of that stuff. Four of the big American tech companies,
S2: the so-called hyperscalers until this year, are estimated to have
S2: spent or have disclosed investment of 1.1 trillion USD in
S2: setting up their AI structures. Right. So that's Amazon, Google, meta, Microsoft,
S2: and they're estimated to spend this year on top of
S2: that 1.1 trillion. Another 745 billion USD. So that's just
S2: just four of the companies just in in, you know,
S2: up till today essentially to the end of this year. Uh,
S2: but then looking beyond that, there are credible estimates that
S2: the whole sector will spend $9 trillion in physical investment
S2: in this sector over the next four years to 2030.
S2: So to put that in perspective, total US annual GDP
S2: is $30,000,000,000,009 trillion in investment in one sector. You can
S2: see this is a huge new source of investment and activity.
S2: But then so that's the physical investment. Then you get
S2: to the stock market where all the speculation is going on.
S2: And that's where it really gets out of control. The
S2: market capitalization today, uh, it fluctuates, but, uh, today approximately
S2: won't change that much in the next 24 hours of
S2: all AI related companies on the US markets is 27
S2: trillion USD, again compared to 30 trillion annual GDP. So
S2: just the size of the market value of those companies
S2: is roughly the size of the entire output of the
S2: US economy in a given year. Now you could say, well,
S2: isn't that good? That's impressive. Yeah, it's a huge transformative technology.
S2: Why not put a lot of money into this? Well,
S2: the problem, Samantha, is that this is a classic investment frenzy,
S2: a boom.
S1: And we know it follows a boom.
S2: Yes, we do know what comes after a boom. Um,
S2: also starts with the letter B.
S1: Yeah.
S2: Um, two ways of coming at this one. I'll read
S2: from a paragraph from the Bank of International Settlements annual
S2: report in June. The Bank of International Settlements is often
S2: called the central Bank of Central Banks. It coordinates all
S2: the central banks around the world. And they put out
S2: an annual report on risks to the economy and as
S2: well as prospects. Um, they talked about instructive parallels being
S2: the canal mania of the 1830s, the British railway mania
S2: in the 1840s, the electrification exuberance of the late 1920s,
S2: and the.com boom of the late 1990s, they all shared
S2: one common tray a genuine technological breakthrough that attracted capital
S2: in excess of what commercial returns could ultimately justify. These
S2: episodes ended with an eventual reversal in investment inducing, economy
S2: wide recessions bust and the current Wall Street frenzy the
S2: bank described as bearing resemblance to these precedents. So that's
S2: that's one we have. This is a standard pattern. There
S2: is a real technological breakthrough. But investors in the excitement
S2: and shall we say, greed of wanting to get in
S2: on the boom. Yeah. Go over the top. Invest way
S2: more than the the actual underlying companies and technologies can
S2: ultimately return. Yeah. And they go market collapses. And there's
S2: so much wealth tied up as there is today in
S2: those shares that when they crunch, it drags the whole
S2: economy down. And as they've said, the most recent was
S2: the.com boom from 1999 20, which we well remember. The
S2: other way of looking at this is just to get
S2: a gauge, I guess, a numerical indicator. The best I think,
S2: and I wrote a book about the US, I. In fact,
S2: I predicted the global financial crisis in a book I
S2: wrote called Bubble Man about Alan Greenspan. My great crime, though,
S2: Samantha was. I was two years early. Um, uh, but,
S2: you know, um, that's worse to be.
S1: Now, you know, keep all your good ideas. Just bank them. Yeah,
S1: just thank them for a couple of years, and you'll.
S2: Only push the button when you see it starting to crumble.
S1: Yeah, exactly.
S2: But, uh, this measure is market capitalization. So the total
S2: value of shares on the market in this industry compared
S2: to or the overall market, total stock market compared to
S2: a country's GDP. Uh, historically, when you get significantly over 100%,
S2: when the market capitalization is more than the total value
S2: of the underlying economy in a given year. That's a
S2: red zone territory where you can expect there's going to
S2: be a bust. On the other side of it, in
S2: the case of the.com boom, it got up to about
S2: 140 150% of GDP. Wow. Um, at the moment, with
S2: the AI frenzy in Wall Street, it's up above 200%
S2: of GDP. So this is really out of whack.
S1: Uh, it's currently at two. Wow.
S2: Yeah. Okay. So there's 27. Is the AI related stocks
S2: alone $27 trillion worth. But if you take the whole market, uh,
S2: covering all US industries, and that's, that's the comparative measure
S2: that I'm using, it's well over 200% of GDP. So
S2: by historical standards, in recent centuries, this is a whopper. Uh,
S2: and as you say, with a boom, the bigger the boom,
S2: the bigger the bust. Timing is the tricky part, but
S2: it will bust. So, uh, there are a couple of
S2: the ways in which you can not only see the
S2: the patterns, but you can see the dimensions and hence
S2: the original phrase you use. The US is betting the house.
S1: Right.
S2: On AI.
S1: After the break.
S2: If you're in a competitive market, you can't afford to
S2: be charging way more than your competitor. I mean, look
S2: at what the Chinese system has done with electric vehicles,
S2: where they now command 60% of the world market and
S2: the Americans are being crushed.
S1: Okay. So you know how I love to ask you
S1: to pull out your crystal ball. So does any of this.
S1: And the precedence, does any of this suggest when this
S1: AI bust might be coming for all of us?
S2: Well, uh, I'll just dust off the crystal.
S3: Yeah, exactly.
S2: It's gone very.
S3: Foggy. Yeah, yeah.
S2: Well, there's a famous quote from John Maynard Keynes, the
S2: noted British economist, who said that markets can remain irrational
S2: longer than you can stay solvent. In other words.
S1: Just trying to tease that out.
S3: Yeah.
S2: In other words, bull markets run longer than anybody expects.
S1: Okay.
S2: So who knows. But this is a well advanced bull market.
S2: We saw it take a hit. It was a big scare.
S2: Big shudder. A couple of weeks ago. Hit the Korean market,
S2: hit the US market and had reverberations around the world.
S2: It could happen at any time. You need a displacement event.
S2: A displacement event can be any shock that changes. The
S2: outlook can be a change in official interest rates. Monetary
S2: policy right. It can be an investment shock or it
S2: can be a shock from a competitor, let's say China.
S1: Well, this is what I wanted to ask you about
S1: because if the US is betting its house economically speaking
S1: on AI, I guess tell us what's happening with China
S1: because there's really a battle now, right? It's really China
S1: versus the USA in terms of who's going to come
S1: out on top in terms of AI capability and infrastructure
S1: and so forth. So tell us how China is doing then.
S1: Are they also betting the House?
S2: Well, the orthodoxy until early last year was that the
S2: US was years ahead of everybody, including Chinese friends.
S3: Yes.
S2: And then early last year, there was the so-called deep
S2: seek shock, deep seek being the Chinese company that produced
S2: a new AI model, which was, uh, at the same
S2: or similar level to frontier models in the US, just
S2: as capable. Yeah. But had two advantages. One much cheaper.
S2: It had been developed at a cost of about 8%
S2: of the ChatGPT equivalent that it was compared with, and
S2: used far fewer chips. And like all the Chinese models
S2: coming onto the market, its so-called open weight versus the
S2: US ones, which are all closed systems, open weight simply
S2: means you can anyone can download these models and you
S2: can tinker with them. You can customize them according to
S2: your own company's needs or institutions needs or whatever it is.
S2: The American proprietary systems are all tightly locked and closely guarded,
S2: and that rattled everybody. But pretty soon the juggernaut on
S2: Wall Street resumed. Just overlooked that. But it's happened repeatedly now,
S2: and the latest one was just two weeks ago, when
S2: a company called moonshot produced its new model, Kimmy three,
S2: which again, was right up there in the top, uh,
S2: comparable with the top 2 or 3 most advanced and
S2: most expensive US models. But the advantage of the Chinese
S2: offering of Kimmy three is that you could operate it
S2: at one third the cost, and it's open weight, so
S2: you can model it to suit yourself. So this gave
S2: the market a big shock. Uh, Wall Street took a
S2: hit again, but it only took a couple of days.
S2: There was some strong earnings results from the big American
S2: tech companies. And the market said, oh, let's just get
S2: on with this. We're in the middle of the Bulls
S2: are running. Let's just keep running. And they did. And
S2: so the market recovered and will and will continue for
S2: a while. But this is a really important moment because
S2: it shows that the the Chinese system, first of all,
S2: is capable of producing not just 1 or 2. There
S2: have been multiple of these companies now, AI startups that
S2: are capable of producing top notch competitive AI models that
S2: cost a fraction, a small fraction of what the US
S2: companies are producing. Now. If you're in a competitive market,
S2: you can't afford to be charging way more than your competitor.
S2: I mean, look at what the Chinese system has done
S2: with electric vehicles, where they now command 60% of the
S2: world market and the Americans are being crushed. Look at
S2: the next one, which is humanoid robotics, where Musk. Elon
S2: Musk has been bragging about how he's going to produce
S2: this great robot. They're still struggling to get it into production.
S2: The Chinese, in the meantime, I've got 180 manufacturers already
S2: selling humanoid robots. Fully functional on the global market. More
S2: than 300 models and last year accounted for 90% of
S2: the global market. Because quality is good, price is cheaper. EVs.
S2: Humanoid robots are. Now we're going to see this play
S2: out in AI.
S1: So essentially what you're saying is the American AI market
S1: is is it inevitable then. Are we at that point
S1: where it's inevitable that the AI market in America and
S1: elsewhere is just going to be crushed by the Chinese
S1: AI market?
S2: It's not inevitable. And Lord knows this is this is
S2: frontier stuff on the technological frontier. So anything can happen.
S3: Right.
S2: But if you if you were a betting person, you
S2: would look at, for example, the technological tracker maintained by Aspi,
S2: the Australian Strategic Policy Institute, which is an internationally recognised benchmark,
S2: where they say of the I think it's 64 technologies.
S2: They rate as critical advanced technologies in the world today. Yeah.
S2: China is leading the US in 59 of those, nearly
S2: all of them. And the Chinese technological momentum is surging
S2: and carrying the Chinese systems to the fore in almost
S2: every sector. So the the pattern and the momentum is
S2: distinctly with China to catch up to or surpass the
S2: US in various multiple almost all technological fields. This is
S2: why it's on the cusp with AI now on the
S2: cusp of seeing which way this goes. So we've talked
S2: about the massive investments in the trillions of dollars that
S2: the US companies are making. Last year, according to Stanford University,
S2: they have a lab that monitors all things AI. According
S2: to them, Chinese private sector investment in AI last year
S2: was just 12 billion USD 12 billion. At the same time,
S2: each of the major US companies is spending many multiples
S2: of that, each one of them spending in collectively trillions
S2: against 12 billion. No wonder the Chinese can charge lower
S2: prices because they have lower capital outlays. So this contrast
S2: is striking. And it's increasing. And we'll see where it goes.
S1: Okay. So if everyone though is partaking in this AI
S1: boom and therefore a bust is headed presumably at some point,
S1: possibly even a recession, does that mean that China would
S1: be slightly insulated from that? Like if it's spending way
S1: less than, say, everybody else is, or in particular the
S1: US is? Might it be less vulnerable to a bust
S1: or a recession than, say, America or even us?
S2: Exactly right. It's it's a really important point, because if
S2: you're only spending that much. So while the Wall Street
S2: companies have got AI companies and related to AI companies
S2: have got capitalization of 27 trillion outstanding in the marketplace,
S2: the Chinese equivalent is about 4 trillion. So, you know,
S2: the US crash has got that much to fall. The
S2: Chinese crash has only got that much to fall. We
S2: head into this phase with the US having bet the
S2: House on AI, whereas China has just bet maybe a
S2: couple of the bedrooms, right?
S1: Okay, well, I wanted to I guess just to wrap up, Peter,
S1: I wanted to talk about, I guess, what's happening more immediately, perhaps, uh,
S1: in things that threat, perhaps the American market and beyond.
S1: Because of course, Donald Trump still has two and a
S1: half years left of his presidency. So his economic stewardship
S1: will be around for a while.
S3: But I'm sure.
S2: It'll pass in a.
S3: Breeze.
S1: Oh that's right. Yeah, I'm sure it'll be effortless for
S1: everybody involved. But he is struggling right now, isn't he,
S1: to rein in the economic chaos that he has arguably
S1: unleashed with this war with Iran? The chaos sort of
S1: comes and goes. The market reacts, goes up and down,
S1: depending on what's happening with the Strait of Hormuz. So
S1: I guess just tell us the latest. Is Trump any
S1: way to inking a deal with Iran that will convince
S1: the Iranians to reopen the Strait of Hormuz and not
S1: impose shipping fees for entrance, because that's sort of been
S1: the long running. I mean, it's been going for a
S1: while now.
S3: Yes.
S1: And it's the markets don't like it.
S3: Yes.
S2: We've seen this two step dance.
S3: Yes.
S2: Well, nobody really likes it.
S3: No one likes it.
S2: Everybody would like to have a predictable supply of oil, fertilizer, hydrogen,
S2: all the other things that flow through the Strait of Hormuz.
S2: But we've seen this two step dance from Trump many times.
S2: And one day it's going to be he's going to
S2: end their civilization the next day. They're great friends and
S2: and smart people.
S3: That's right.
S2: Um, so yesterday it was going to be the biggest
S2: attack since World War Two. He was about to launch
S2: on Iran. Right. And then today, not only does he
S2: say they're negotiating, but Scott Bessent, his Treasury secretary in
S2: the last few hours, has said that a deal is imminent.
S2: At the same time, however, the Iranians are saying there
S2: is no negotiation whatsoever.
S3: That's right. So take your pick.
S1: And then on Monday, I think Trump was saying all
S1: they do is make me angry. They just make me
S1: more angry. I think he was saying that the Iranians
S1: were unbelievably duplicitous. But apparently Scott thinks things are going great. So.
S2: Well, Scott thinks it's going well. And of course, the
S2: Iranians have a different view because they say that twice
S2: now where the US has commenced attacks on Iran last
S2: year and then again this year, they were in the
S2: middle of negotiations with the US across the table at
S2: the time the Americans launched hostilities. So they would see
S2: the duplicity coming from the other side. Yes, but look, both.
S2: They've both got themselves in this Gordian knot of antagonism
S2: and distrust. And it's it's impossible to know how and
S2: when that will ultimately resolve. So we'll come back next
S2: week and we'll have another look.
S1: That's right. Well, thanks, Peter, as always for your time.
S2: Pleasure to chat with you, Samantha.
S1: In other news today, experts say concerns about recent buyers
S1: going into negative equity in the current downturn are overblown.
S1: With less than 1% of home owners in negative equity
S1: across Australia, AI could deliver the national economy a desperately
S1: needed productivity boost worth almost $120 billion, and support the
S1: creation of tens of thousands of jobs, according to nation
S1: leading analysis of the burgeoning boom. And former international English
S1: cricketer Ben Stokes believes that cricket's relationship with alcohol has
S1: not moved on as the game has become more professional,
S1: but denied that the England team he captained for around
S1: four years had a drinking problem. You can read more@theage.com.au
S1: or smh.com.au. Today's episode was produced by Kai Wong. Our
S1: executive producer is Tammy Mills, and our podcasts are overseen
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