How to make $35 trillion ... disappear

0:01NPR

0:11The AI boom has had a lot of people comparing this moment to the dot-com crash. That's when the U.S. stock market boomed on the promise of the Internet, but then dropped about 50 % from its peak. Gita Gopinath is the IMF's former chief economist and second in charge. She's now at Harvard. And Gita has gamed out what a dot-com-style bust would actually mean for the economy today. We're talking about growth basically coming to a standstill in the U.S. This is The Indicator from Planet Money. I'm Darian Woods. Today on the show, a conversation with Gita Gopanath about the possible erasure of$35 trillion from the global economy.

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1:57Simple as that. Learn more at capitalone.com slash subscriptions. Terms and conditions apply. Economist Geeta Gopinath joined me from her Harvard recording studio late November. So I think we have all the gadgets we need. Looks like a very serious microphone there. So today I want to explore how the U.S. stock market could mean trouble for the rest of the world. And to set the scene, can you describe what's been behind the U.S. stock market's pretty big increase over 2025? If you want to understand what's happening in the U.S. stock market, I think it also helps to go back about 10 to 15 years, which is that if you compare the performance of the U.S.

2:40stock market relative to other stock markets around the world, the U.S. has been exceptional. So it was a one-way bet in terms of putting money in U.S. equities. And so that's what happened was not just U.S. households and firms put their money in the stock market, but the rest of the world also basically put a lot of their money in the U.S. stock market. So that's how 2025 started. Now, since then, it's grown by another 14 % in terms of the value of the S &P 500. So it's a strong stock market. What's underlying that is the dynamism of U.S. tech. So if you take the Magnificent Seven, which is the seven big tech stocks, that drives about 40 % of this increase in valuation that we've been seeing over the last many years.

3:33The Magnificent Seven companies are Microsoft, Meta, Amazon, Apple, Google, NVIDIA and Tesla. They're investing heavily in AI. A lot of people's savings are invested, one, in the U.S. stock market and therefore, ineffectively, seven companies. So what's keeping you awake at night? If we look at some numbers, so I'll give you one number, which is looking at the ratio of the price of stocks to the earnings of companies. It's the price to earnings ratio. This is now at the second highest level in the last 100 years. So the first highest level was just before 2000. So it was just before the so-called dot-com bust when we had a crash.

4:19The valuations are really high, and that gives you some pause. Yeah, this is the CAPE ratio. We've actually talked a bit about this on the show before. Indeed. Now, that doesn't mean that there's going to be a crash tomorrow or in six months, but it does tell you that the valuations are high. And so if the American stock market is in some kind of bubble and it pops, what's a scenario that might happen? One useful way to think about this is to compare this to what happened after the dot-com bust, right? When you had in 2000 a large stock market crash. So over two years, the stock market fell by like 50-60 % cumulatively over a two-year period.

5:05So if something similar were to happen this time around, given the scale of wealth that's now invested in the U.S. stock market, we're looking at U.S. households losing about$20 trillion in wealth and the rest of the world losing about$15 trillion in wealth. Now, these numbers are much larger than what it was 25 years ago. So if you take that number and then you translate that into what typically happens to consumption, you could see consumption growth dropping by 3.5%, which then means U.S. economy as a whole, that growth dropping by 2%. And just to keep some numbers in mind, the U.S. economy tends to grow around 2%.

5:52So just through this channel, we're talking about growth basically coming to a standstill in the U.S. So you're saying if the stock market were to do what happened in the dot-com bust, the stock market would crash quite a bit and cause households to spend less. And then that would translate into going from a growing economy to a stagnant economy. That is correct. Pretty close to recession, if not in recession. And this is, I'm actually giving you some pretty, you know, conservative numbers. I think the effects could be bigger. And so it's interesting that this is a U.S. problem with huge U.S. effects.

6:33What could that look like for other countries? Those who would be hit most are Europeans because they are the ones who are actually exposed to U.S. equities much more than, say, developing economies or emerging economies or so on and so forth. So there will be spillovers to them too. But we know this, that when the U.S. goes into a recession, that pushes down growth prospects everywhere because it remains the case that U.S. consumers are a big source of demand for things that people produce elsewhere, everywhere in the world. So that's going to slow down economies globally. Even for the U.S., I would say that it's getting increasingly harder to ride out crises because when the dot-com crash happened, the U.S.

7:25government increased its spending by a lot. And that helped right the economy, right? It helped stabilize the economy and prevent things from getting worse. But right now, because U.S. debt is about 120 % of GDP and the rates at which they're borrowing are high, it's not easy to simply go and increase spending. So you've succeeded in scaring me quite a lot. But on the flip side of this argument, could it be premature to raise an alarm over a potential bubble? Is it possible that investors will miss out on huge gains if, for example, AI is as transformative as promised? I think we should all be humble about the fact that it's hard to precisely pinpoint when you may have a correction in the market, right?

8:22Ideally, what we would like is there to be some adjustment that happens gradually over time. If it happens slowly, it's okay. The bigger problem is if there's a big crash. And so I think it's not a bad idea for everybody to pay a little more attention to valuations of companies to see how much of their portfolio is dependent on these seven stocks and maybe diversify some. And are we seeing other countries starting to reduce their exposure to the U.S. as well? We are certainly seeing that there is more capital now going to other parts of the world. Part of that reason is because there is a sense in which U.S.

9:06stock markets are so high in terms of their price, they become very expensive. So, in fact, this has been a very good year for emerging and developing countries. You've seen capital go into those markets much more than they did in 2024. for. So when you're at dinner parties, how do people react to your scenarios of potential doom? So firstly, I'm not trying to be a doomsayer. I think everybody I talk to agrees with the math. The math adds up. If you have a dot-com crash, it's about 35 trillion. That is indeed correct. There are some people who are more optimistic about how things may play out, and they could well be right.

9:50You know, I think the big question everybody has to ask is this very large amounts of investments that are happening in AI is not coming along with a clear sense of where the revenues will come from to make up for all these very large amounts of investment. Well, Geeta Gopinath, you have left me more worried than when I started, but thank you so much for joining The Indicator. Thank you, Darian. The idea is to worry about something so that you can act on it, and then you don't have to worry about it. This episode was produced by Cooper Katz-McKinn with engineering by Robert Rodriguez. It was fact-checked by Sierra Juarez.

10:32Kate Concanon edits the show and The Indicator is a production of NPR.

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