AI, Interest Rates and Circular Ponzi Finance

October 19, 2026 | Last week, readers of The Institutional Risk Analyst doubtless noted that as the great circular Ponzi scheme known as “AI” was sagging, viola, LT interest rates fell. Some observers ascribe this phenomenon to a “flight to quality,” at least in relative terms, as prices for Treasury debt and other “risk free” assets rose due to investor demand. The charts below show the 30-year Treasury bond yield minus SOFR (h/t David Kotok).

AI-related and technology stocks suffered steep declines during the week ending October 16, 2026, driven by rising borrowing costs, heavy debt loads from data centers which may never be built, and rapidly cooling profit expectations. The Philadelphia Semiconductor Index (PHLX) plunged 11.4% for the week after an eight-session losing streak—its worst weekly performance since April of 2025.

All of this confusion says to us that the real risk from AI is not that a rogue computer will destroy the world or display your confidential financial data on X. The clear and present risk from AI is that the greed and stupidity of the promoters is literally crowding out other legitimate needs for capital, including financing the federal budget deficit. The chart below from SIFMA shows overall fixed income issuance through September. Notice that Treasury issuance is relatively flat but corporate debt issuance was surging.

In classical terms, economists often worried that government debt issuance would “crowd out” legitimate private sector capital needs. The advent of AI, however, presents us with a different problem, where the unbridled avarice of the global investor class is allowed to run wild. Keep in mind that much of the promised “revenue” from AI is fanciful at best, thus the stock offerings and debt issuance predicated on these absurd projections of revenue and income are very probably tainted by fraud.

The term "circular fraud" or "circular financing" in AI refers to an intertwined loop of investments, purchases, and revenue recognition where the same money moves in a circle between a small group of tech giants, chipmakers, and AI startups. Most legal and financial analysts note that these transactions are technically legal vendor financing rather than illegal "round-tripping" (as in the case of Enron or 777 Partners, for example). Critics call it a structural or functional fraud on investors because it manufactures the appearance of customer demand rather than organic, bona fide end-user profitability. 

We previously noted the example of private equity investors in AI ventures being compelled to purchases services from the target in order to bolster post-money valuations. This is simply a continuation of the incestuous habits of private equity bankers who buy loss leading portfolio companies from one another to window dress the "implied" valuations of their mistakes, this even as they continue to earn fees. When you see PE funds sprouting "continuation" vehicles, that is your signal to demand early redemption.

“Imagine a company that sells you equipment, invests money in your business, and then rents back what you build with it. It’s your supplier, your investor and your customer all at once,” notes Ruipeng Liu in a post on Open Forum last week. “That’s known as circular financing. Many artificial intelligence (AI) companies, including Microsoft, Amazon, Google and Nvidia, have adopted a version of this opaque method of financing.”

With the effective end of Trump II roughly two weeks away, the reason for the weakness in AI stocks is apparent. So long as the Grifter in Chief was in control of both houses of Congress, the promoters of AI investment schemes could misbehave with impunity. With the prospect of a Democratic win in one or both Houses of Congress, however, the political scales are tilting against AI. Indeed, the surge of cash into Democratic fund raising coffers over the past 30 days tells us all that we need to know. 

The good news of sorts is that the deflation of the AI financing bubble will probably see a continued decline in LT interest rates. If you work in banking or residential mortgages, the deflation of the AI bubble is very good news. For the past six months, LT interest rates have been pushed higher by the surge in financing for AI-build outs, both public and private, and also the interest rate hedging that finance providers have put in place to protect them from adverse market moves.  As the AI craze has cooled, LT interest rates have fallen.

Source: dataQollab

Over the past 24 months, tech companies, data center operators, and infrastructure providers have raised hundreds of billions of dollars in debt to finance the artificial intelligence or AI boom. According to estimates from Goldman Sachs (GS), AI-related debt issuance reached nearly $500 billion in 2026 alone. But when we combine the sales of Treasury and other risk-free debt to hedge these exposures via interest rate derivatives, the numbers go into the trillions. Interest rate swaps written by GS and other major banks have surged since the end of 2025 as shown in the chart below. Notice that Bank of America (BAC) is leading the pack, but Wells Fargo (WFC) is sitting out the AI party.

Source: FFIEC

In 2025, Big Tech and AI-adjacent firms raised a record $108 billion to $220 billion in corporate bond and debt markets (more than triple previous historical averages). Major "hyperscalers" (such as Amazon, Alphabet, Microsoft, and Meta) account for roughly 40% of this debt-raising wave, while the rest comes from specialized AI infrastructure players, "neoclouds" (Don't you love these idiotic AI hype labels?), and project-finance special purpose vehicles (SPVs). 

To repeat, Mickey Maini, author of The Entropy Trap: What Physics Knows That Markets Don’t, noted in a September 2026 interview in Gulf Business, “the compute will outlast some of the balance sheets financing it…” AI is not going away, but a number of the organizations that have tried to acquire a pole position in the race to true commercial viability may be annihilated. Call it "creative destruction" but some investors could suffer significant losses in the process.

It may still be too early to pick winners and losers in the great AI race, but the selloff in AI stocks over the past month promises to increase visibility into this Darwinian process. In less than a month between mid-September and mid-October 2026, several major AI-related or "ecosystem-adjacent enterprises" have publicly announced delays or withdrawals of their initial public offerings (IPOs) as investors push back against sky high valuations. Does the unwind of the AI bubble threaten global markets with a systemic event? That all depends on whether you are surprised or not.

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