Transcription
Look, okay, if you want to get rich, you have to understand how the economy works. And the best way to understand that is to see all of the times it failed. In this video, we're telling you the stories behind the four most significant economic crises in modern history. The Great Depression, the.com crash, the 2008 financial crisis, and at the end, we're letting you decide whether or not we are actually in an AI bubble. So, let's get straight into it, shall we? Welcome to Alux.
All right, so let's start off with the Great Depression, okay? Because it was the worst economic crisis in modern history. The US economy shrank by nearly 90%. One in every four Americans was out of work and more than a third of all banks in the country collapsed. But the depression wasn't just contained to the US. It changed the course of history on a global scale. And even today, you're probably still feeling its effects. So let's break it down. What really happened during the Great Depression, what caused it and how it changed the world.
Now, before we can talk about the depression, we need to understand the world that came before it. Okay? So, let's go back to the early 1920s. World War I had just ended, and it forced countries to industrialize, to build factories, improve logistics, and mass-produce weapons and supplies. When the fighting stopped, those factories turned their attention toward consumer goods. The assembly line pioneered by Henry Ford with the Model T had transformed production. Suddenly, companies could make more products faster and cheaper than ever before.
Now, at the time, the United Kingdom was still the world's leading economic power, promoting free trade across its global empire. Less developed countries largely supplied food and raw materials while industrial countries like Britain, Germany, and the United States turned those materials into finished products and sold them around the world. It was the beginning of modern globalization.
And in this new economy, no country thrived quite like the United States. Unlike Europe, the US had emerged from World War I with its cities intact and its industries booming. Women were in the workplace in larger numbers than ever before and soldiers were returning home. So, factories were returning to full capacity. Jobs were plentiful and optimism was everywhere. With the rise of radio, advertising, and mass production, America entered the age of consumerism and things seemed perfect on the surface. But they weren't.
As the roaring 20s went on, banks started lending more and more money, not just to businesses, but to ordinary people. Most couldn't afford to pay for expensive products like cars, refrigerators, and washing machines upfront. So, banks filled that gap with loans. Now, at first, it worked beautifully. People bought more, businesses grew, and the money kept circulating throughout the economy.
Because of this, the American stock market was booming. So, a bunch of ordinary people who had never owned stocks before started investing their savings. Eventually, people ran out of savings. But since the market just kept climbing, many of them decided to borrow money to keep investing and banks were more than happy to help. They began lending money specifically for stock speculation. Now, again, the logic was simple. Borrow cash, buy a stock, wait for it to rise, sell it, repay the loan, and pocket the difference. As long as prices kept rising, everyone made money.
And it did work for a while. From 1921 to 1929, US stock prices did nothing but go up. The Dow Jones did a 6x for crying out loud. But people were forgetting a painful reality. Just because stocks are hot doesn't mean the economy is. And at the time the cracks were already starting to show.
So underneath all of the optimism in Wall Street, the economy was actually not doing so great. Even by the mid-1920s, consumer demand, which was essentially the backbone of the economy, had started slowing down. Turns out people only need so many toasters. Across the ocean, Europe was still recovering from World War I, and couldn't afford to import as many American goods. It started slowly, but US factories were producing more stuff than people actually wanted to buy. Supply was outpacing demand. But the stock market had become completely detached from reality. By 1929, around 40% of all US consumer debt wasn't being used to buy homes or start businesses. It was being used to buy stocks. It was a bubble built on borrowed money. And when people finally began to doubt that prices would keep rising, that is when everything started to fall apart.
So on October 24th, 1929, panic hit Wall Street. In a single day, the market dropped 11%, an all-time record back then. The day became known as Black Thursday. The following week, on October 29th, now known as Black Tuesday, prices collapsed another 12%. Within just a few weeks, the stock market had lost nearly 40% of its value, and millions of Americans lost their savings. For those who had borrowed money to invest, it was even worse. Their investments were now worthless, but they still had to repay their loans. The bank that had loaned them the money now faced massive losses. Over the next few years, the stock market continued sliding down until it finally bottomed out in 1932, down almost 90% from its peak.
Now, something that's important to note here is that a lot of people think the stock market crash of 1929 was the Great Depression itself, but in reality, it was only the beginning. The true disaster came when financial panic spread into the real economy. So the stock market crash was just the first domino to fall and once it did it set off a vicious chain reaction across the entire economy.
The first thing that happened was simple. People stopped spending money. Consumer spending was the backbone of the American economy at the time. But after the crash, many had lost their savings or were trying to repay loans. So instead of buying things, they use the money they had to save or pay off their debt. When spending drops, businesses earn less and they either have to pay people less or lay them off. And if that's not enough, they go bankrupt. That meant unemployment rose, which means even fewer people could afford to spend, which meant the cycle just kept on repeating. And the less people spent, the worse things got.
As the months went by, people in businesses started defaulting on their debt. And when borrowers go broke, lenders suffer, too. Especially the banks. Now, the thing about the banks back then is that there was no JP Morgan or Bank of America holding trillions of dollars in assets. In the 1930s, the US had thousands of small local banks. And when one of their customers went bankrupt, that loss hit the bank hard. So, when banks started going bankrupt, panic spread very fast. Everyone rushed to withdraw their money before their bank failed. These were called bank runs. At first, it happened at small local banks since they were the most at risk. But soon, the panic spread to bigger ones, too. Even healthy banks began collapsing, not because they were mismanaged, but because everyone was too scared to leave their money inside. By the time it was over, about one-third of all banks in the US had failed. And back then, when banks failed, their customers lost everything.
To make things even worse, the people who did manage to pull their money out in time weren't putting it into the banks. They were keeping it at home. That meant that banks had no money left to lend out. And when banks stop lending, businesses can't get loans to grow and people can't get loans to buy homes or start companies. In other words, the economy's fuel, money, just stopped moving.
Now, at the same time, factories across the country kept producing goods because they had to. Factories are expensive. You can't operate one by selling 10 refrigerators a month. You need to sell thousands. The problem obviously was that people weren't buying. So, supply was way up and demand was way down. And look, okay, ask any economist in the world what that means and they will say one word, deflation.
Now, deflation is the economic term for prices in an economy going down. In this case, it was happening because businesses wanted to get rid of their stockpiles. And you know, at first glance, deflation sounds kind of like a good thing. Things are becoming cheaper and people can afford stuff now, right? Well, in reality, deflation is actually one of the worst things that could happen to an economy. Think of it like this. If a car costs $50,000 today, but only $40,000 3 months from now, when are you going to buy it? Well, obviously you're going to want to save yourself 10 grand. But take an entire economy of people thinking that way, and what do you get? Less consumer spending, the thing that is causing the depression in the first place.
So basically, the Great Depression was a vicious cycle of many interconnected factors making each other worse. Falling prices led to less spending. Less spending led to more bankruptcies. More bankruptcies meant fewer jobs. And fewer jobs meant even less spending. And just like that, the US was in a full-blown crisis.
But just to put this into perspective, it's worth asking, why do we call it the Great Depression? Well, technically when an economy shrinks for two quarters in a row, six months of negative growth, it's called a recession. When a recession gets really bad, it earns a new name, a depression. Now, this one was so severe that people simply started calling it the Great Depression. The official economic contraction lasted from August 1929 until March 1933, 43 months later when the stock market finally hit rock bottom. That makes it the longest and deepest recession in modern US history.
Now, technically that marked the end of the recession because the economy stopped shrinking and began to grow again. But that did not mean that things were good. The stock market was down 90% from its peak. And at one point, unemployment reached 24.9%. Just think about that. One out of every four Americans with no way to provide for themselves or their families. Living in that kind of economy was devastating and the recovery was painfully slow. The economy was growing again, yes, but it was growing from a completely shattered base. Poverty, homelessness, and crime were rampant, and breadlines had become a daily reality. The truth is, the pain of the Great Depression didn't really end until 1939, when World War II began, and factories started running again to supply the war effort. And it took until 1952, 23 years after the crash, for stocks to finally climb back above where they had been in 1929. That is how devastating this period really was.
And in the middle of all of this, the United States had to respond somehow. But the way the government handled this, especially at the start, didn't just fail to fix the problem. It actually made things worse. You see, by this point, the US economy was a mess. Businesses were collapsing, banks were failing, and people were terrified to spend money. The government somehow had to get people buying things again, especially American-made goods. More spending would mean more business activity, more jobs, and eventually higher prices to fight off deflation. So, one of the first things they tried was to raise import taxes on more than 20,000 foreign goods by about 20%, hoping people would buy local instead. And for those of you wondering, yep, that's a tariff. And yep, it completely backfired. Almost immediately, 25 other countries responded by raising their own tariffs on US goods. So, the few American businesses that were still exporting suddenly lost their foreign customers. More factories shut down and even more people lost their jobs. In fact, global trade, which had once been booming, collapsed by about 66%. So, that definitely didn't help.
The government's next goal was to stop prices from falling further. Now, at the time, the US dollar was tied to the gold standard, which meant the government could only print as much money as it had in gold to back it up. But that made it almost impossible to inject new money into the economy. So, in 1933, President Franklin D. Roosevelt took the US off the gold standard for just a few years. This gave the government the freedom to print more money and with it they started lending to banks which could then lend to people and businesses again. They also began funding large public works projects building roads, parks, bridges, and schools. All of which created jobs and pumped cash directly into the economy. Roosevelt also raised taxes on the wealthy to fund social programs for the unemployed, the elderly, and the disabled.
To fix the banking crisis, Roosevelt's administration rolled out a wave of reforms. All part of what became known as the New Deal. Banks were required to hold a minimum amount of money in reserve so they couldn't run out of cash overnight. They declared bank holidays, temporarily closing banks so people couldn't withdraw all of their money at once. And before reopening, every bank had to be inspected and certified as stable. Now, behind the scenes, those inspections were sometimes little more than just some paperwork. But the government's stamp of approval restored public confidence, and people started depositing their money again instead of hiding it under the mattress. With more deposits, banks could lend again, which meant more money circulating through the economy.
To make things even safer, the government introduced FDIC insurance, which guaranteed that if a bank failed, people would still get their money back up to a certain limit. And that wasn't all. Okay. The New Deal also brought in Social Security, the Securities and Exchange Commission, unemployment insurance, minimum wage laws, and overtime pay. Now, these changes, they didn't magically fix everything overnight or anything. Unemployment stayed painfully high for most of the 1930s, and it took years for the economy to stabilize and for prices to start rising again, which after years of deflation was actually a good thing. But these reforms laid the foundation for the modern financial system every American is a part of today and for the slow, steady recovery that would follow.
But, you know, before we forget, the Great Depression wasn't just an American problem. Remember, as world trade collapsed by about 66%, entire economies that relied on exports were suddenly cut off from their income. Prices for things like coffee, sugar, cotton, and materials fell through the floor, and places like Latin America, Africa, and Southeast Asia, which depended on selling raw materials or agricultural goods, had their economies crippled almost overnight. Industrial nations were hit just as hard. But in different ways. In Europe, unemployment soared as factory after factory shut down. France entered years of stagnation. In Britain, unemployment climbed past 20%. And in Germany, their situation was catastrophic. The country was already hanging on by a thread after World War I. But the depression gave rise to extremist political movements. And we all know what comes next. Similarly, Japan's exports collapsed. So it militarized and launched invasions to secure its own resources which played a huge role in World War II. So as you can see the Great Depression didn't just reshape economies, it reshaped history in a very real way.
But what was learned through all of this? Because out of all the devastation came some important lessons. We learned that a little bit of inflation is actually a good thing. That during crisis, governments have a vital role to play in steering the economy and that government spending could be used to stabilize demand and pull economies out of a downturn. And that idea became foundational for modern economic policy in much of the developed world. By the end of the depression and especially after World War II, most major economies had restructured their banking systems, added social safety nets, and accepted that government intervention was a necessary part of keeping capitalism alive. Maybe most importantly, the depression taught people that recessions and crashes aren't just numbers on a chart. They're human stories. Behind every percentage point of unemployment, there are millions of lives turned upside down. So, the Great Depression wasn't just an economic crisis. It was a turning point in how we understand money, markets, government, and people.
Okay, my friend, if you're watching this video and you made it all the way here, we're willing to bet you're the kind of person who actually cares about becoming the most successful, most capable version of yourself. And listen, at this point, we've spent 15 years on the same journey, okay? We've been where you are, and we learned a lot along the way. So, to organize all of that information for you and give you the tools that you need to succeed, we built the ultimate app to turn you into the ultimate version of yourself. It's called the Alux app, and it is designed to turn you into the best version of yourself ever. All right. Inside the app, you'll find daily lessons that help you level up your money, intelligence, fitness, even your confidence in relationships. We've even got experts in there teaching you courses one-to-one. These people charge thousands of dollars for an hour of their time. But inside the Alux app, you can learn from them for less than the price of a nice dinner for two. Honestly, every ambitious person, CEO, entrepreneur that has gotten this app has told us it's more than paid for itself within that first month alone. And right now, you can go to alux.com/app to download it and scan this QR code on screen to get 25% off your yearly plan. That's alux.com/app and scan that QR code for your discount. Now, with all that said, let's get back to the video, shall we?
All right, so next up, we've got the dot bubble. Another one of the biggest financial disasters in modern history, but this one is, well, it's a little bit odd to say the least. On one hand, it created overnight millionaires. But for millions of ordinary people, it was devastating. But probably the craziest thing about the dotcom bubble, and most people never talk about this, is that as devastating as it was, it also made the modern world possible. If it hadn't happened, the internet and the world that we live in today might look very different and probably much worse. So, let's get into it.
All right. What caused the dot bubble? How it came crashing down and why maybe, maybe it might have been a good thing. So to understand the dotcom bubble, we first need to understand the world it happened in the '90s. So back then the Cold War had just ended. The world seemed more peaceful than ever and the US economy was bouncing back from a short recession. To encourage investment, they cut interest rates, which meant borrowing money was cheaper. And they even cut capital gains taxes, which is basically the tax you pay on the profits you make from your investments. So naturally, investors were optimistic, and the next big thing was right around the corner.
By the mid-1990s, computers were getting faster, cheaper, and easier to use. More and more they were moving from the office to the home and at the same time the internet was starting to connect the world. In 1990 only about 2.6 million people around the world were connected to the internet. But by 1999 that number had grown to over 45 million. People could see what was coming. The internet wasn't just a way to send emails or chat with strangers online. You could buy things from the comfort of your home. You could talk to your doctor, meet new people, share ideas instantly, even run an entire business online. It felt like everything, communication, commerce, and the very structure of the global economy was about to change. The only problem was no one really knew how yet.
And then came Netscape. And that's where the story of the dot bubble truly begins. So, Netscape, or more precisely, the Netscape Navigator was a web browser just like Google Chrome or Safari is today, but back in 1995, it was the first browser that let you see text and images on the same page. It sounds, you know, almost laughably simple now, but at the time it was revolutionary. Before Netscape, most websites were just blocks of text and blue hyperlinks. You could make some words bold or change a font, but that was about it. If you wanted to see an image, you had to click a link, download it, and wait, sometimes minutes, for it to appear on your computer screen. Netscape fixed that, and better yet, anyone with a computer could download it for absolutely free. Netscape accelerated internet adoption in a massive way, and people loved it. But that was only the beginning.
Okay. In 1995, just a year after launching, Netscape, the company, went public on the stock market. This was one of the first true internet companies, and Wall Street had no idea how to value it, so no one really knew what to expect. At first, Netscape's bankers planned to sell shares at $14 each. But investor demand was so overwhelming, they had to raise the price, not once, not twice, but three times, eventually settling at $28 a share. And when trading opened, the stock doubled in value on its first day, and Netscape's founder, Mark Henderson, became a Silicon Valley legend. But by all appearances, this was extremely odd. Before Netscape, companies usually waited until they were established, stable, and profitable before going public. But Netscape wasn't actually making any money. In fact, it was losing millions every year. But investors didn't seem to care. Everyone could see the internet growing faster than anything before it, and Netscape was the closest thing investors had to buying a piece of that future.
Now, if you're watching this video, we're willing to bet that you're also working hard to build a good future for yourself, building wealth, success, and getting smarter. And that is exactly what we're about here at Alux and why we built the Alux app, to teach you about wealth creation and help you become the ultimate version of yourself. Inside the app, you'll find daily lessons that help you level up your money, intelligence, fitness, even your confidence and relationships. You also get access to full courses from industry experts on topics like entrepreneurship, and personal branding, but even confidence. The kind of skills that actually move the needle forward in real life. And right now, if you scan that QR code on screen or click the top link in the description of this video, you can download the app and get 25% off your yearly plan. Because look, okay, bubbles can burst, markets will crash, but the best investment you will ever make isn't in a stock. It is in yourself. That is how you build real lasting wealth. So go ahead, my friend, invest in your own education. And in the meantime, we'll get back to this video.
So when Netscape went public and its stock price doubled overnight, the reaction across Silicon Valley was instant. Every internet startup looked at that and thought, "If they can do it, why can't we?" Suddenly, a wave of internet-first companies began flooding the stock market. Some were building genuinely innovative products. Companies like Yahoo, Amazon, and eBay. But for every one of those, there were dozens that had no profits, no sustainable model, sometimes not even a clear product.
One of the most famous examples was Pets.com. At its core, Pets.com was a website that sold pet food and supplies online and delivered them straight to people's homes. On paper, it sounded convenient, but in reality, it made absolutely no sense. If a bag of pet food costs $10 at the supermarket, Pets.com might sell it for $11 or $12. The problem was, shipping your turtle's next lunch isn't cheap. Pets.com was losing money on every single sale. At its peak, Pets.com reached a market cap of nearly $300 million, all while generating barely any revenue. But they weren't alone. Dozens of companies just like this were popping up, raising millions of dollars from their IPOs and burning through investors' cash.
You see, a simple way to understand why these businesses were so terrible is by looking at something called the CAC to LTV ratio. So CAC or CAC stands for customer acquisition cost. How much it costs to get one new customer. LTV is lifetime value. How much that customer will spend with your business over time. So, for a business to work, LTV has to be higher than CAC. But in most.com companies, it was more like they were spending $50 to acquire a customer who might only ever bring in $10. They were doomed from the start. And yet, investors just kept throwing money at them because, well, money didn't matter. The internet was new. It was exciting. And people didn't want to miss out.
In fact, a lot of founders didn't even want to make a profit at the time. The sentiment in Silicon Valley was simple. Profits were boring. Growth was everything. So instead of asking, "Is this business sustainable?" The question for investors became, "How fast can it grow?" Some founders even admitted they avoided profitability on purpose. Because the moment a company made money, it started being valued like a normal business. But as long as it stayed unprofitable, its valuation could be based purely on the story, on what it might become someday.
And the results were honestly kind of ridiculous. Okay, in 1999 alone, there were 457 IPOs, most of them internet companies. Of those, 117 doubled in price on their first trading day. That same year, there were 199 publicly traded internet companies with a combined market value of $450 billion despite generating only $21 billion in revenue and a total profit of negative $6.1 billion. That's how crazy it was. But even still, every day, new internet startups were breaking stock market records, and it felt like anyone could get rich.
In the US, the dot boom created a cultural wave of entrepreneurship unlike anything before it. At one point, surveys showed that one in every 12 Americans said they were in some stage of starting an internet business. And if you weren't starting a company, you were investing in one. The low interest rates and capital gains taxes drew in a flood of everyday investors, the first big wave of day traders who wanted to get rich quick.
Unfortunately, like most of the time, the people making the most money from this boom weren't the investors. It was the bankers. To understand why, you have to know how IPOs work. So, when a company decides to go public, it hires an investment bank to manage the process. The bank's job is to set the stock's price, find investors, market the hell out of its stock, and for every IPO, these banks earned massive fees, sometimes tens of millions of dollars, simply for getting the deal done. The thing is, many of these bankers knew the companies they were IPOing were unprofitable and had no realistic path to ever becoming profitable. But their incentive was clear. Get the IPO done. Make it look like a success. Collect the fee and move on to the next one. Yes, that's called securities fraud. But the more IPOs they handled, the more money they made.
And because early IPOs were making people rich, at least on paper, nobody wanted to miss the next big one. That's why the dot boom became such a frenzy. Investment banks aggressively marketed new internet stocks, hyping them up to investors and painting each one as the next Amazon, no matter how worthless the companies were. It got to the point where some companies simply launched a website, added.com to their name, and went public, even if their business had nothing to do with the internet.
It was only a matter of time before it all came crashing down. By the year 2000, things had reached peak insanity. The Super Bowl that year came to be known as the dot Super Bowl because a staggering 17 dot companies spent over $42 million on commercials. One of them, an online wedding invitation company of all things, spent twice its total lifetime revenue, just to buy a 30-second ad slot. That's how detached from reality things had become.
In March of that year, the market peaked. The NASDAQ, which was packed with tech stocks, hit record highs. But like every bubble, it only took a small spark for everything to unravel. So, it's kind of impossible to say exactly what caused it. But for some reason, investors began realizing that most of these companies weren't ever going to make money, and there simply weren't enough buyers to keep the prices rising. So, they began to sell. By April, the NASDAQ had already lost one-third of its value. Many internet companies saw their stock prices collapse by 80% or more. Amazon stock fell over 90% from its peak. And within months, trillions of dollars in paper wealth had evaporated. Some estimates put the total losses at around $5 trillion, and the US went into an 8-month recession. By September 2001, not a single internet company went public. The boom was over.
Now, you know, there's a good old expression that says you have to separate the wheat from the chaff. Meaning, you have to sort out what's truly valuable from what's not. And that's exactly what happens when an economic bubble bursts. The weak companies, the Pets.coms of the world, vanished overnight. But the strong ones like Amazon, eBay, and Craigslist that had real products, real customers, and real business models, they kept on going. And after the dust settled, people seemed to learn that in this new internet world, it wasn't enough to just be online or slap a.com on your name. You need to provide real service value like Amazon or eBay or be a real technology company like Apple or Microsoft.
But the crazy thing was, even though the stock market crash wiped out around $5 trillion in wealth, it also laid the foundation for the world that we live in today. When the bubble burst in 2000, there were roughly 400 million people connected to the internet. Today, that number is over 5.5 billion and growing. So, despite all of the madness, the internet really did change everything from media and publishing to commerce, music, film, and social connection. It reshaped how we learn, work, and communicate. And none of that would have been possible without the dot boom.
Jeff Bezos, who lived through that dot bubble as CEO of Amazon, recently said in an interview that there are two types of bubbles. Financial bubbles and industrial bubbles. Financial bubbles, like the 2008 financial crisis or the Great Depression, only destroy value by doing weird stuff with the economy. They are basically just about money. But industrial bubbles like the railroad boom of the 1800s or the.com bubble, those are different. They happen when people overinvest in a transformative technology. But even after those bubbles pop, the infrastructure and knowledge they leave behind does carry through to the next era of growth.
During the.com boom, companies wanted to be ready for the future. Billions of dollars were poured into things like fiber optic cables, data centers, and servers. Then the crash came. All that infrastructure didn't vanish. In fact, it is exactly what helped the next generation of companies like YouTube, Netflix, Facebook, and Amazon Web Services to rise. For example, YouTube, which you're watching right now, would have never been possible without cheap, high-speed internet connections. And those were only available because so much fiber optic cable had already been laid during the.com boom. The same goes for Netflix streaming, cloud computing, and the modern digital economy.
So yes, okay, the.com bubble was pretty reckless. It was irrational and it destroyed fortunes overnight. But in some kind of strange way, it was kind of the price that we paid to build the modern world. In those five or so years where logic went out the window, we accelerated progress by decades. And so looking back, that's why the.com bubble was actually maybe kind of good. Like maybe a net positive if you zoom way out.
All right, my friend. That's the scoop on the dot bubble. Next up, we've got the 2008 financial crisis, the most significant economic disaster in recent history. But before we get into that, remember you can check out the Alux app to level up your life right here. Just go to alux.com/app to download it and scan this QR code on screen to get 25% off your yearly plan. That's alux.com/app and scan that QR code to get the discount. All right, moving on here.
The 2008 financial crisis. So, if there's one story you need to understand, it is this one. Because in 2008, the world economy came dangerously close to a complete and total collapse. By the time the crisis was "quote unquote" over, global trade had fallen by almost 10%. More than 8 million Americans had lost their jobs, 4 million families had lost their homes, and the stock market had lost half of its value. Honestly, the fact that we still have a financial system after this is kind of a miracle. So, let's take a look at exactly how the system failed and how it almost destroyed the world economy.
Now, before we get into how the 2008 financial crisis actually happened, let's go back a few years and set the scene. In 2001, the dot bubble had just burst and it sent the US into a recession. Not the worst one in history, but still a recession. So to get things moving again, the government and the Federal Reserve started taking some action. The Fed wanted to make it cheaper for banks to borrow money and to lend it out to businesses. So they cut interest rates 11 times. And at the same time, the government wanted more people to own their own homes. After all, home ownership was considered a key part of the American dream. So the government introduced a bunch of new policies that made it easier for Americans with lower incomes to buy a home.
For example, at the time there was a regulation that limited how much debt or leverage that investment banks could take on at 12:1. Meaning if they had, let's say, $1 billion in assets, they could only borrow up to $12 billion to lend out to their customers. But in April 2004, the government lifted that cap, which now let banks borrow and lend out essentially as much money as they wanted to. Now, obviously, looking back, this is crazy. But back then, the reasoning behind it sounded pretty logical. You see, it's actually a good thing when banks have some leverage because when they lend out money, it stimulates businesses, hiring, and spending, and that grows the economy. But how much leverage should they have? Well, who's to say, right? If some regulator just comes up with a random number, there's a good chance that the economy wouldn't grow as fast as it could. So, the idea with this change was that the banks themselves would find the optimal amount of leverage, enough to grow the economy, but not so much that it put them at risk. In theory, it sounds like a solid idea. Banks naturally want to make as many loans as possible because that's how they make money. But, they're not going to make loans to people who aren't going to pay them back. So, they're also going to find a healthy limit, right? Well, unfortunately, it doesn't quite work that way because, as it turns out, the banks were willing to take on a lot more risk than anyone expected.
But here's the thing. These regulations didn't just apply to regular banks. They also applied to investment banks. This is one of the main reasons for the financial crisis, but it's also where things get kind of tricky. If you want to understand how we came within an inch of a global economic collapse, then you need to understand this. The difference between a regular bank and an investment bank is that investment banks see mortgages less as loans and more as something they could sell and profit from. Regular banks loan you the money and you pay them back. But investment banks do something completely different. Instead of making money from people's mortgage payments, these banks actually started taking thousands of mortgages, bundling them together, turning them into a financial product called a mortgage-backed security or MBS.
So to show you how this works, just imagine a bank had issued $1 billion worth of mortgages. Over time, as homeowners made their payments, those mortgages would bring in around $1.5 billion. But instead of waiting years to collect that money, the bank would take those mortgages, package them into an MBS, and sell them to another investor for, say, $1.1 billion. That meant the bank made $100 million instantly, and whoever bought the MBS would earn their profit over time as homeowners kept paying their mortgages.
Now, when you look at what's happening here, there's nothing really inherently broken about it. In fact, if the banks are responsible, this system works well for everyone involved. But there was a hidden problem. If the mortgages inside these MBS's went bad, the investment banks were no longer on the hook. They had already sold the risk. And remember, these investment banks could now borrow pretty much infinite amounts of money, which meant they could just keep on doing this. So when the banks eventually ran out of borrowers who were considered safe, they did not slow down. Instead, they lowered their standards a little bit, giving out loans to people who were a little riskier but would probably still be able to pay back. When they ran out of those, they lowered their standards a little more and more and more until eventually some banks started giving out what they called ninja loans. Short for no income, no job, no assets.
Now, these types of loans, which are given to people with a higher risk of not paying them back, are called subprime loans. When the loan is to buy a house, it's called a subprime mortgage. And now, thousands upon thousands of those subprime mortgages were being turned into mortgage-backed securities. To make things even worse, the banks realized they could also do this with almost any kind of loan. And that's when they created a new financial instrument called collateralized debt obligation or CDO. These things, well, they're basically the same as an MBS. It's a big collection of debts, except this time not just to mortgages, but also car loans, business loans, credit card debt, corporate bonds. They can even have MBS's inside of them. And you know the movie Inception, how you can go inside of a dream within a dream within a dream. Well, some of these CDOs's were so complex, they actually contained other CDOs's inside of them. So, it was kind of like Inception, but with financial products.
But, I mean, who was actually buying all of these CDOs and MBS's? Well, pretty much everyone. Big banks, hedge funds, insurance companies, even pension funds were pouring money into them. And they bought them because they had convinced themselves that by bundling thousands of loans together, they were somehow making the whole thing safer. A few people might default, sure, but not everyone would, right? And over the long run, the rest would keep on paying and everyone would get their money back. What could go wrong, right?
Well, the problem, of course, was that many of these loans inside of these bundles, especially the mortgages, were subprime. Now, obviously, if the companies buying these CDOs and MBS's knew this, they would have stayed as far away from them as possible. But unfortunately, the financial crisis wasn't just a systemic failure. It was also caused by simple human corruption. You see, even though these investment banks operated differently from traditional banks, they were still regulated to some degree. They still had to publish detailed financial disclosures and crucially get their products rated for risk. The higher the rating, say AAA, the safer it was meant to be. But here's the problem. The agencies responsible for giving those ratings were private companies, and the people paying them were the investment banks themselves. That's a massive conflict of interest. If a credit rating agency gave a bad rating to one of these banks, the bank could simply take its business elsewhere to another agency willing to hand out a more favorable score. So to keep their clients happy, many credit rating agencies started inflating their ratings. They labeled bundles of bad loans, the subprime mortgages we talked about earlier, as AAA, the same rating given to the safest investments in the world. It was a house of cards, but for a short while, it worked.
With so many people suddenly able to borrow money, demand for housing exploded. Home prices kept rising and developers thought that buyers would keep on coming, so they just kept building bigger, more expensive homes. Everyone seemed to be getting richer. But of course, I mean, this couldn't last forever. By 2006, housing prices had climbed so high that ordinary people simply couldn't afford homes anymore. Taking on a mortgage became a huge financial risk and prices had risen so much that people were starting to think twice about buying. In 2007, home prices finally peaked and at the same time the mortgage payments on many of those subprime loans that we were talking about started increasing. The housing boom was over and that's when everything came crashing down.
Remember at this point the entire financial system had been built on top of these subprime mortgages. Banks, hedge funds, and insurance companies were all holding mortgage-backed securities and CDOs stuffed with these risky loans. And suddenly, people who were already stretched thin saw their payments skyrocket while the value of their homes was going down. Inevitably, thousands of homeowners started to default on their mortgages. Because of this, in 2007, a dozen major investment banks that specialized in subprime lending went bankrupt. Even massive investment banks like Bear Sterns started showing cracks after two of its hedge funds failed after losing billions on MBS investments. Banks suddenly realized there was all of this toxic debt flowing around the economy, but they had no idea who was holding it or how much they were holding. Because of this, the banks stopped lending money. And that's when the panic spread. When banks stop lending money, the economy stops growing, companies start laying off workers, and when people lose their jobs, even more of them can't pay their mortgages. It was a vicious cycle, and it was just getting started.
When the Federal Reserve tried to fight back by cutting interest rates, the goal was to make it cheaper for banks to lend money, keeping businesses running, protecting jobs, and helping people to stay afloat on their mortgages. But it wasn't enough. By March 2008, Bear Sterns was on the brink of collapse and the Fed had to broker an emergency deal where JP Morgan bought the company for pennies on the dollar. Around the same time, the government had to bail out two massive mortgage companies that together were responsible for roughly half of all of the home loans in the United States.
September 15th, 2008 became the day of the largest bankruptcy in US history when Lehman Brothers, an institution with nearly $700 billion in assets, fully collapsed after the government refused to bail them out. The next day, the Fed had to give AIG, an insurance company that had bought millions of dollars worth of CDOs's, an emergency loan of $85 million to stop them from collapsing. This was happening all over the country and it felt like the entire financial system was collapsing. So, the government had no choice but to step in. To keep the financial system from completely imploding, Congress passed a massive $700 billion bailout package that went to financial giants like Bank of America, Croup, JP Morgan, Morgan Stanley, Goldman Sachs, Wells Fargo, and Mural Lynch. But controversially, that money came from taxpayers. Ordinary Americans were losing their homes, their jobs, their savings, while the same companies that had caused the disaster were being rescued. To make things even worse, many of the executives of these companies ended up paying themselves millions of dollars in bonuses when the year ended. And that infuriated people. Of course, it did. Still, others argued that without the bailout, the entire global economy would have collapsed. And to be fair, I mean, it probably did prevent an even deeper catastrophe, but that didn't mean the damage wasn't already done.
The scale of the 2008 financial crisis was historic. It sent the US into the worst recession since the Great Depression. The stock market lost about half its value. Around 4 million Americans lost their homes, and another 4 million were forced to refinance them and get into more debt just to stay afloat. 8.7 million Americans lost their jobs and unemployment hit 10%. And it didn't just stop in America. These mortgage-backed securities and CDOs had been sold all over the world. So when the US housing market collapsed, the shock waves spread globally. Stock markets around the world crashed, Iceland's entire banking system collapsed, and global trade fell by nearly 10%.
To get the economy growing again, the Federal Reserve slashed interest rates to almost zero, making money virtually free to borrow. And in 2009, the Obama administration passed a bill with a $787 billion stimulus package designed to jumpstart the economy. But perhaps the bigger issue was making sure something like this never happened again. So in 2010, Congress passed the DoddFrank Act, an enormous wave of new regulations aimed at exactly that. Technically, the recession that followed the crisis lasted only about 18 months, but the road to recovery
was much longer. Household incomes [music] took years to get back to pre-recession highs. The stock market didn't fully recover for 6 years, and unemployment stayed high long after the headlines moved on. That's just what happens in a recession. The market might recover, but people's lives change forever. And you see, for a lot of people, things never fully went back to normal after the 2008 financial crisis. Millions of people lost their homes, their jobs, and their savings. And honestly, the whole thing kind of shook people's faith in the system. Things did get better eventually, but now we know that nothing is truly too big to fail.
All right, my friend. That was the financial crisis of 2008. Now, if you're enjoying this video so far, make sure to drop a like on it. And remember, you can join us inside the Alux app for 25% off by going to alux.com/app and scanning that QR code on screen. That's alux.com/app and scan that QR code on screen to get the discount.
All right, moving on. Once again, 2008 was the last big economic crisis that we've gotten through, but um I mean, as we're making this video, it's been about 17 years. You know, we don't want the economy to go down, but look, everybody's talking about the AI bubble these days, but are we actually in one? Well, we've put together all of the best arguments that we could find for and against us being in an AI bubble. And we've also gone and investigated if we are in one, what is going to make it pop. And at the end, we're even asking AI what it thinks of these arguments. So, stick around for that. But let's just get right into it, shall we?
All right. Okay. Now, before we start, let's make one thing crystal clear. This video is not not financial advice. We are not telling you what to do with your money. We just want to present the best arguments on both sides of this debate because surprisingly, there are some pretty compelling points for both. But let's start off with the bull case. The argument that we are not in an AI bubble, or at least not in the way that you think, or at least not yet.
Now, you've probably heard people say that what's happening with AI right now feels a lot like the.com bubble all over again. You know, there's endless amounts of money being thrown around for this revolutionary new technology that still hasn't changed the world, but it will one day. Now, at first glance, that sounds about right. But when you actually look closer, the two situations are really quite different. Back in the late 1990s, during the boom, the internet was new and nobody really understood it. So investors were just pouring money into anything that had the word.com in its name. It didn't even matter if the company made money or not. So you had companies like pets.com whose entire business was literally selling pet food online. A business that made no profit, had no real plan to become profitable, but was valued in the hundreds of millions of dollars. There were hundreds of companies like this, okay? businesses that didn't actually use the internet in any interesting or innovative way, but simply existed on the internet. For a while, stock prices went up and everyone looked rich on paper. But for most of these companies, it was only on paper. When the investors finally realized that many of them didn't have a real foundation, the bubble burst. Thousands of companies went bankrupt almost overnight.
When you look at what's happening in AI today, it's like comparing apples to oranges. This time, the money flowing into AI isn't going into some random startup with untested ideas and no real business. It's coming from some of the biggest, most established, and most profitable companies in the world. Google, Microsoft, Amazon, Meta, and others. Take a look at any of their quarterly reports and you'll see that despite spending hundreds of billions of dollars on AI, many of these companies are still posting record profits. And that is a big big difference. These are companies worth billions of dollars in cash sitting in their bank accounts. Microsoft isn't going into debt to fund AI. Google isn't mortgaging its future to build new models. They're reinvesting profits from already successful businesses. the money being spent is real. So in that sense, the AI boom is built on much stronger financial ground than the dot boom ever was.
Now, another reason the AI bubble might not actually be a bubble has to do with the nature of the technology itself. The internet in the late '90s was full of promise, but it wasn't yet useful for most people. You couldn't stream videos like this or store photos on the cloud or use Google Maps on your phone. Those things came much later. AI, on the other hand, is already useful today. [music] Say what you will about AI generated slop, but millions of people use AI every day. Whether it's for writing, coding, image generation, or automating parts of their jobs. Even if the technology isn't perfect, it's already making a lot of tasks faster and easier. It's saving people time. and in some cases saving companies money.
And then there is the infrastructure side of things. So unlike the '90s where startups were trying to invent entirely new systems from scratch, like building the foundation for a house, [music] AI is being built on top of an already established foundation. We already have cloud computing, global data centers, powerful GPUs, and decades of software innovation to build on. That makes the ecosystem much more stable. So [music] if some individual projects fail, the servers, the chips, the algorithms, the infrastructure they're built on won't disappear. And finally, it's worth remembering that the companies funding this revolution aren't desperate startups hoping for survival. No, they're trillion dollar giants with capital, talent, and the global infrastructure to keep investing for as long as it takes. So, even though AI might seem overhyped right now, that doesn't necessarily mean that it's a bubble. A bubble pops when there's no real value underneath. But in this case, there's clearly something real being built. AI might not make everyone rich overnight, and it might take a while for the true impact to really show. But that does not mean it's hollow. It might just mean that for once the hype is pointing towards something that actually matters.
All right, now, let's look at the other side of this argument, shall we? The bear case. Because for every reason people give to say that this isn't a bubble, there's an equally strong argument that maybe it is. So, first of all, there's the fact that a lot of people are not finding AI [music] useful. According to a recent study, around 95% of companies that have tried to integrate generative AI into their operations reported zero improvement in productivity and some actually got worse. Only about 5% say they saw a positive return. That's an astonishing number when you think about how much money is being poured into this right now. It means that for every company successfully using AI to boost its bottom line, 19 others are wasting money trying to make AI fit where it doesn't belong. And you know, a lot of businesses rushed into AI out of fear of being left behind. But even though it's great at generating text [music] or code or images, that doesn't automatically solve their problems. And that's the key distinction. Usefulness isn't the same as profitability.
Now, another point people are raising is that there's a massive gap between what AI was supposed to become and what it actually is right now. AI is supposed to be well revolutionary. It's [music] supposed to change how everything works. People were talking about artificial general intelligence, machines that could think and reason like humans. But so far, what we've actually gotten are AI girlfriends, image generators, and video tools that are impressive, sure, but not worldchanging. Take Open AI's Sora 2 for example. It can generate beautiful, realistic, and genuinely impressive videos. But it's being used basically as a glorified meme generator. And honestly, the last thing we need right now is more short form social media slop to scroll through. A lot of people are arguing that if this is the best these AI companies can give us, then AI is not the technological revolution it's cracked up [music] to be. It's not solving deep structural problems in science, medicine, or education. It's not curing diseases or revolutionizing manufacturing. Even when you look at Google's new AI mode search feature, it's a similar story. Okay, look, it is better than the Google search of the olden days. Sure, but it's not a hundred times better. It's just barely slightly better. Which makes you wonder if this is the technology that's supposed to change everything, why does it feel [music] like a minor upgrade?
Anyway, probably the strongest [music] argument to be made that AI really is a bubble is that a lot of the companies leading this AI boom aren't making any money from it. When you look at companies like Open AI, Anthropic, or even Google's AI division, almost all of them are massively unprofitable. Running large language models like chat GPT is incredibly expensive. Every prompt [music] takes massive amounts of computing power to process, which means massive amounts of electricity. Multiply that by millions of users every day and that translates into massive [music] costs which means every time you ask chat GPT a question, Open AI loses money. Now, Open AI does have a paid plan that millions of people pay for, but still it is nowhere near enough to make up the cost for running the system. They're still [music] deep in the red. And that's the case for almost every major AI company right now except for one, Nvidia.
Now, Nvidia isn't building models or running chat bots. No, they're selling the GPUs and chips that power AI training and inference. [music] So, in a way, they're the ones selling the shovels during the gold rush. That creates a strange dynamic where the companies building AI products are bleeding money while the ones supplying them the tools are booming. Which raises the question, [music] how long can this bleeding continue? Because right now it's being kept alive by investment, [music] not profit, investment. And that's where things start to look a little bit shady. Recently, there's been a growing concern about what's called roundtpping, which [music] is when companies fund each other's growth in a closed circle. So, Nvidia recently announced it would invest up to $100 billion in OpenAI to [music] fuel its data center expansion. Almost immediately, OpenAI confirmed it would spend a huge portion of that capital to buy Nvidia's chips. And Nvidia [music] counts this as pure revenue. Weird, right? But it gets even weirder. Okay, Open AI just [music] promised AMD, another chip company, that they would buy a ton of chips from them, too. And as a part of the deal, Open AAI gets 10% [music] of AMD's stock. While Oracle, a big cloud computing company, recently [music] cut a $30 billion deal to provide cloud services and data center capacity for OpenAI. So Oracle gets business from OpenAI, which is funded by Nvidia and owns a big chunk of AMD [music] and then gives that money back to Nvidia and AMD for chips. Money is flowing in all directions and on paper, everyone looks like they're [music] growing. The problem is it's the same money being passed around in circles and open AI doesn't make any money of its own. A lot of people are arguing that this kind of behavior isn't just weird, it's dangerous. AI isn't being [music] fueled by its own profits. It's just being fueled by investors who eventually want to see their dollars turn into more dollars. [music] And that's just not happening right now. If the investments dry up, Open AAI stops buying Nvidia [music] chips, Nvidia's growth drops, Nvidia stops investing back in OpenAI, Oracle stops building AI data centers, and Nvidia sells fewer GPUs, and the whole market [music] comes crashing down.
So, those are the best arguments for and against the AI bubble. And look, okay, we here at Alux, we're not saying either of [music] them is right. And we're definitely not telling you what to do with your money, but let's just pretend for a moment that we are in an AI bubble. In that case, you're probably going to hear a lot of people throwing around the word recession. But it's not as simple as that. There's an important distinction between the AI bubble popping and that causing a recession and a recession popping the AI bubble. So, when a bubble causes a recession, it's usually because the bubble grows so big and is so inflated that when it bursts, it takes the whole economy down with it. [music] That's what happened in 2008 when the housing market crashed. But the other scenario is the opposite. Sometimes it's not the bubble that causes the recession, [music] but the recession that pops the bubble. When the economy slows down, investors get nervous [music] and they stop pouring cash into high-risk sectors like AI. The troubling thing is based on the latest data, that [music] second scenario might be the one that we're heading toward.
According to JP Morgan, right now there are around 30 companies that are massively invested in AI, making up around 44% of the total value of the S&P 500. [music] Think about that for a second, okay? Nearly half of the stock market's value is concentrated in just [music] 30 companies, all of which are deeply tied to the same technology. So what happens if the economy slows down, if we hit a real recession? Well, [music] in the past few months, there have been several reports suggesting that while the AI boom is lifting the stock market, it's also hiding how weak the rest of the economy is. In 2025, somewhere around 40% [music] of America's real GDP growth will have come from tech companies spending money. And most of that was AI related. [music] Without that spending, the US economy would have only grown by 0.1% in the first half of 2025. [music] So practically nothing, no growth at all. And some analysts warned that if you strip away AI related spending, the [music] US might already be in a recession.
So, right now we're in a bit of a strange situation. The AI sector is so big and growing so fast that [music] it's making the economy as a whole look good. But if the part of the economy that is not AI starts suffering too much, and that's what these reports are warning about, [music] then we could be in for one hell of a downswing. If investors start pulling money out of AI to cover their losses in other parts of their economy, the [music] biggest most powerful companies in the world, Microsoft, Google, Nvidia, Amazon are also the ones most exposed. [music] But smaller startups would also shut down on mass leading to layoffs across the entire economy. [music] The industry would shrink dramatically, leaving only a handful of massive players who could afford to keep on going. And that's kind of the irony of it all. The companies that turned AI into a bubble might also be the only ones big enough to survive it popping. But maybe that's what has to happen because sometimes bubbles also reset things. They [music] clear out the noise and force the real value to show through. And just like the internet, if AI really is the next great technological revolution, it'll survive the pop. It just might look very different on the other side. [music]
All right, so we teased this already. So, what do you think chat GPT has to say about this? We gave [music] it the script for this video, told it to analyze the arguments, and asked it for a one-word answer to the question, are we in [music] an AI bubble? And well, it thought for about 12 seconds and said, probably. Just go to alux.com/app to download it and scan this QR code on screen to get 25% off your yearly plan. That's alux.com/app and scan that QR code to get the discount.
All right, my friend, that is it for this huge video. Thank you. Really, thank you from everyone here at Alux for watching all the way through. We really hope you learned something from this one. But anyway, Aluxer, we'll see you back here next time. Until then, take care, my friend.