Economist Paul Krugman is drawing sharp parallels between the current state of the AI trade and the final years of the dot-com boom in the 1990s, while warning that investors might be misreading the Federal Reserve’s recent signals and actions.
AI Boom Bears ‘Unmistakable Resemblance’ To The 90s
In his newsletter on Wednesday, Krugman said the U.S. economy in 2025 has been “schizoid,” shaped by conflicting forces. On one side, President Donald Trump “abruptly reversed 90 years of U.S. trade policy” and “pushed tariffs to levels not seen since the 1930s,” creating “uncertainty” that is “depressing the economy.”
On the other hand, he highlighted the monumental surge in “AI-related investment,” which is “boosting the economy,” despite the broader slowdown.
See Also: Eddie Wu Doesn’t See An AI Bubble For The Next 3 Years: Alibaba CEO Doesn’t ‘See Much Of An Issue’
Krugman, however, warned that the current AI boom “bears an unmistakable resemblance to the tech boom of the late 1990s,” a period that ended in a long unwinding rather than a sudden collapse.
Rate Cut Rallies Are Just ‘Dead Cat Bounces’
While debate continues to rage on whether or not there’s an AI bubble, Krugman called out a specific market behavior that he found to be eerily similar to the past.
According to Krugman, AI-linked stocks have been reacting strongly to expectations for Fed action even though “these strong reactions don't make sense.”
He pointed to Bloomberg's Mag 7 index, which had been sliding amid growing concerns regarding the AI bubble, before it “surged” on Monday as markets interpreted Fed remarks as signaling a higher chance of a rate cut.
He said, “Some of us have seen this movie before,” noting that the deflation of the 1990s tech bubble involved a series of “dead cat bounces,” similar to what was seen earlier this week. At the time, many investors believed in the “Greenspan put,” Krugman said, referring to former Fed Chair Alan Greenspan.
However, he said that the rate cuts back then did little to alter the long-term trajectory of the last tech collapse, while warning investors not to expect a similar rescue effort by the Fed this time around.
Experts Split On AI Bubble Narrative
Prominent analysts and experts remain split on the AI bubble, giving rise to significant uncertainty among businesses and investors.
Treasury Secretary Scott Bessent dismissed these concerns on Tuesday, saying that the massive “AI build out” will broaden into a wider industrial resurgence in the country.
Similarly, Cathie Wood of Ark Invest pushed back on bubble concerns, saying, “the AI story has just begun.” She blamed the recent market turmoil on a “liquidity squeeze,” while noting that this trend will reverse over the course of the next “few weeks.”
Investor and author Ruchir Sharma, however, is growing concerned that the U.S. economy is now dangerously reliant on a single tech narrative. The United States is now “one big bet on AI,” he said, highlighting the deep structural vulnerabilities resulting from the same.
Photo Courtesy: A.PAES on Shutterstock.com
Read More:
© 2025 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
