The Bank for International Settlements, the so-called “central bank for central banks,” has published its annual report for 2026, titled I. Progress and peril, and it describes both the potential and risks facing artificial intelligence. Among the potential upsides of artificial intelligence, the paper’s authors explain that it could generate “accelerating super-exponential growth.” The authors explain:
Artificial intelligence (AI) has the potential to differ fundamentally from earlier waves of technological progress. Previous general purpose technologies, such as the steam engine, electrification and information technology, raised workers’ productivity by providing them with better tools. AI could go further by augmenting the production of knowledge itself. If, at some point, AI systems can improve their own capabilities and “create” technology and ideas, the macroeconomic consequences could be profoundly different from past innovations. A key constraint on long-run growth, namely the rate at which humans can generate new ideas, could be lifted.
Recent research has begun to formalise this possibility. Trammell and Korinek (2023) argue that if AI capital becomes a sufficiently close substitute for human labour, the economy can transition from the regime of constant exponential growth to one of accelerating super-exponential growth. As machines autonomously improve themselves, the economy acquires a self-reinforcing engine of growth. Jones and Tonetti (2026) identify a supply side counterforce. If different economic tasks are strong complements, the overall output would be constrained by the task that is improving slowest, the weakest link. AI progress in automated tasks could then fail to translate into faster aggregate growth if essential human performed tasks hold output back. Trammell and Korinek (2023) also argue that economies currently operate in this complementarity regime, implying that the transformative scenario remains a possibility rather than a present reality.
The BIS authors also note the potential risks facing the AI buildout, writing:
In the near term, the ongoing AI investment boom raises questions about the sustainability of the current economic expansion. The five largest hyperscalers are set to spend over a trillion US dollars on AI-related capital expenditure from 2025 through 2026. These commitments are outpacing earnings and the free cash flow of these firms, leading some to issue debt to raise additional financing (Graph 11.A). This investment race may be partly driven by the perception that only a small number of players with superior technology will ultimately dominate the market shares. The intense competition raises the risk of firms over-committing resources to investment projects with still uncertain returns, leaving all firms vulnerable to disappointments in AI payoffs. Model analysis based on such contest motives highlights the downside risk of current AI exuberance. As competitive pressure drives capex higher, the net economic surplus – the total payoff less investment costs – declines for the sector as a whole and could turn negative in adverse scenarios (Graph 11.B). Disappointment in returns could trigger a sudden pullback in financing and turn the capex boom into a protracted investment bust, with potential knock-on effects on financial conditions (see below).
Another risk is that the AI boom runs into a supply side roadblock. The AI build out has recently been facing growing bottlenecks in electricity, advanced semiconductors and grid equipment. Fast-growing demand for computing power is already pressuring electricity prices and input costs, with potential spillovers to inflation. Looking ahead, these temporary shortages may also amplify over investment, as firms attempt to lock in future capacity through long-dated contracts that further expose them to any disappointments in demand.
Historical episodes of investment booms offer instructive parallels (Graph 11.C). The canal mania of the 1830s, the British railway mania in the 1840s, the electrification exuberance of the late 1920s (roaring 20s) and the dotcom boom of the late 90s all shared one common trait: a genuine technological breakthrough that attracted capital in excess of what commercial returns could ultimately justify. These episodes ended with an eventual reversal in investment, inducing economy-wide recessions. The scale and pace of the current AI investment boom accompanied by expectations of large productivity payoffs bear resemblance to these precedents, highlighting potential downside risks in the near term.
Action Line: As artificial intelligence works its way further into the economy, investors will see its effects in more industries, and its long-term effects will become more apparent. When you want to talk about your portfolio and the future, email me at ejsmith@yoursurvivalguy.com. And click here to subscribe to my free monthly Survive & Thrive letter.
