The other Great Depression

Thom Benny profile picture Thom Benny September 16, 2024

September 16, 2024


The new railroad across America the world

Dear Reader,

Most people think the Great Depression started with Wall Street’s notorious 1929 crash.

This is because most people have short memories. Few bother digging into history very far.

As a Benchmark reader, you are clearly not one of these people.

Sometimes, we can learn more about the present and near-term future by paying attention to things that happened a long time ago.

Especially when those things perhaps seemed implausible in their time.

Today, I want to take you on a ride to the 19th Century.

More specifically, a ride that starts with great promise and winds up running off the rails into chaos and ruin.


AI train wreck

The promise & peril of new tech

The United States of America would not be what it is today had the railroad industry not taken off there in the 1800s.

The railroad allowed the industrial revolution early in the century to explode out of the northeast of the country and propel settlement and developments in the west.

Journeys that previously took months now took only days; the frontier was wide open.

The first passenger and freight line opened in 1827 and gave rise to nearly 50 years of continuous building.

Until, that is, the Great Depression few today remember. More on that in a second.


The first transcontinental railroad

It didn’t take long for speculation and regulation to poison the pure promise of the railway revolution.

Building railways cost lots of money. This meant borrowing, over-leveraging and rampant speculation.

This speculation began to influence the industry itself: While there were plenty of short railways initially, most of these were folded into trunk lines due to a fast-developing financial system based on Wall Street’s appetite for railway bonds.

(Credit to Thomas Pueyo at Uncharted Territories for the summary.)

As so often happens when speculation runs wild — especially concerning a novel and significant technological development — consequences quickly followed.

The other Great Depression

After the American Civil War, the railroad boom went to another level — companies laid 33,000 miles, or 53,000km, of track in just five years.

Grants, subsidies and speculation fuelled the boom.

The railroad industry become one of the largest employers in the country.

Over-expansion hit hard. Mountains of money became tied up in projects that offered no immediate return.

The market for railway bonds collapsed. The companies that had borrowed all the money couldn’t repay it when the banks came calling.

In 1873, 55 railroad companies failed. Another 60 collapsed inside 12 months. Development and growth fell off a cliff.

This triggered a chain of bank failures and closed the NYSE.

Strikes, riots and protests broke out.

The contagion spread to Europe and marked the beginning of two decades of economic pain for Britain that became known as the Long Depression.


Schwarzer Freitag (Black Friday) on the Vienna Stock Exchange as the railroad crash hit Europe

Until 1929, the US knew this crash as the Great Depression, when the subsequent crisis stole the moniker by setting a new standard for financial crisis and economic strife.

So, Reader, 150 years on, what can we do but observe the parallels?

AI = 21st Century railroad?

We’re living in the AI boom times.

The market is projected to more than double in the next few years.

NVIDIA — current king of the AI jungle — recently became worth more than most nations’ GDP.

Here’s some parallels between the AI and railway booms.

Rapid growth and expansion: The AI industry is currently going through explosive growth, with an expected annual growth rate of 37.3% from 2023 to 2030.

Rampant speculation: The AI market is already commanding substantial investment, with the market size expected to grow from $454.12 billion in 2022 to around $2,575.16 billion in the near future. Analysts are currently mid-freakout regarding how far NVIDIA and the other big tech companies can go riding the AI wave.

Transformative impact: Railroads revolutionized transportation and commerce in the 19th century, becoming the largest employer outside of agriculture. Similarly, AI is poised to transform pretty much every aspect of life and business.

Overexpansion concerns: The railroad boom led to economic overexpansion, with most capital invested in projects offering no immediate returns. While the AI industry hasn’t faced a similar crisis, there are concerns about the rapid proliferation of AI technologies and their potential economic impacts.

Competition and market saturation: Many railroads overbuilt, leading to ruinous competition for freight traffic. In the AI industry, we’re seeing a proliferation of AI models and applications, which could potentially lead to market saturation and intense competition.

But that’s not all.


Watercolour Van Gogh by AI

Perhaps most alarming of the parallels is the cost to build AI products.

According to Thomas Pueyo:

‘ Foundation models are the software that power OpenAI’s ChatGPT, Anthropic’s Claude, Meta’s Llama, Google’s Gemini, and the like. It’s very expensive to make them. Today, it’s in the order of hundreds of millions of dollars. In the not-too-distant future, it will likely reach billions, and within a decade, it might reach a trillion.’

What that means, is despite AI’s seemingly limitless promise and potential, it actually costs loads to produce.

And that cost is only going higher.

Take a look:


This has a lot to do with the bullishness around NVIDIA — they produce most of the chips that make is possible to build AI.

Will AI send the market off the rails?

History doesn’t repeat itself, but it does rhyme‘, as Mark Twain famously said.

He also said ‘denial ain’t just a river in Egypt‘.

Well, this being one of the more dense and expansive Benchmark emails I’ve written to you, I think it’s only appropriate I defer to a higher intelligence to try to give you a takeaway insight.

At least, that’s what I tried to do.

I asked my current AI tool of choice, Perplexity, this question:

What’s the likelihood that the AI boom crashes the economy in the next five years?

This is what I got back:


Let’s hope this crash doesn’t spiral into a stock market and economy-wide contagion that dwarfs our current definition of Great Depression and consigns 1929 to lesser-known history.

Quote of the week

In the 1848 gold rush to California, most gold diggers didn’t make much money, but the shovelmakers made a fortune. NVIDIA is today’s shovelmaker.’

— Thomas Pueyo

Earn dividends? You should see this…

Navarre’s latest video covers a massively misunderstood aspect of investing.

This common mistake once nearly led him to sell a stock he’d made a great return on, thinking it had lost him money.

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video preview

That’s it for The Benchmark this week.

Forward this to to share the insight with someone who’d enjoy it.

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Until next week!

Invest in knowledge,

Thom
Editor, The Benchmark

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