Again, this is how all of economics works.

A Toyota dealership arranges a loan for you. Through a bank for a used vehicle, sometimes through Toyota itself for new cars.

A house builder will routinely take on part of the loan providing burden to get some of the interest.

Even someone selling you their thirty year old house will often provide seller financing.

You may have ideological opinions against this, which is fine. There are billions of people, for example that are fundamentally opposed to the idea of interest. But like it or not, this is how it has worked for the last ~500ish years.

It is strained analogy, heavily. I am not paid by Toyota. I am vetted for my ability to pay the loan. Me buying a car with borrowed money is not circular financing.

If most of Toyota earnings went from money they borrowed to me, it would be an issue. But, in fact, that is not how Toyota business works.

Car manufacturers, famously, have a pretty decent fraction of their revenue coming from their financing subsidiaries.

> I am vetted for my ability to pay the loan

Exactly!

Now see the article we are commenting on. Nvidia reduced the loan amount, presumably because they had doubts about OpenAI being able to pay it back.

The framework used to loan you money for buying a car and loaning a company billions of dollars to buy GPUs is largely the same. That's one of the accomplishments of modern economics.

Of course it can and does fail, but everything can go wrong.

> Car manufacturers, famously, have a pretty decent fraction of their revenue coming from their financing subsidiaries.

Which is not the same thing as circular financing we are talking about here.

Yes, if you abstract everything enough, everything is exactly the same as everything. But that does not mean it amounts to meaningful argument.

"A Toyota dealership arranges a loan for you. Through a bank for a used vehicle, sometimes through Toyota itself for new cars.

A house builder will routinely take on part of the loan providing burden to get some of the interest"

Wrong - when you borrow money the bank has instantaneously created money for you with the asset of your future promises of delivery of cash flows.

The bank is not using somebody elses money - it is literally creating it. Debt is akin to raw material for banks - the debt being the money it now owes you today.

Its interesting how many people get close to 90% of getting it, but the last 10% is actually 90% of the understanding.

What you said is not wrong, but also is completely unrelated to what I said.

> "bank is not using somebody elses money"

Did I say the bank was using someone else's money?

It turns out what’s fine for companies to do with individuals at relatively small scales is not fine for companies to do at massive scale and leverage

Our currently accepted models of macroeconomics are based on exactly the opposite assumption - that scale reduces issues.

It could be wrong, sure. But extraordinary claims require extraordinary evidence.

For what it's worth, I agree with you on the leverage part, just not the scale part.

No, I get this; it is not a problem. It becomes one when they cannot pay back this financing, in the event that they cannot build a sustainable business, which they cannot, because the capital cycle leads to overinvestment, meaning the financiers cannot meet their returns.

https://s-1.vercel.app/posts/the-capital-cycle-theory/

It's a problem when there's 10x leverage AND the underlying asset massively deprecates in value.

Neither of those look likely yet.

Taking a multi-decade perspective, I wonder if our general analysis is focused too much on the initial wave of LLM tech and current gen GPUs.

Owning a massive data center connected to water and power and network that can be targeted or converted to developing needs seems like a decent problem to have for the big cloud companies. We have compute hungry companies and media, in addition to cryptocurrencies etc, and we’ll have more of them in 2045.

I don’t know if I’m underestimating how purpose-built these datacenters are, or overestimating the accountants in the corporate vehicles building them, but the broader situation doesn’t seem as fragile as 1929 or 2008 (even if the businesses are overvalued and LLMs fall totally out of fashion).

You're right.

This is more like a real estate cash grab.

I'd guess that it'll only get more and more difficult to obtain permits to do this in future. And expensive.

Similar to how if you want to buy land and build a house, it's pretty much impossible nowadays in the vicinity of a decently sized city.

But fifty year old houses are dime a dozen.

You don’t think GPUs depreciate massively in value? I think they are written off to zero in less than 5 years.

And if you look at the ARR of the companies “buying” them, I think we can see there’s some significant leverage going on.

H100, almost a five year old GPU, costs more to buy used now than it was to buy brand new at release.

Of course, everything has a lifespan.

Consider a simple arithmetic problem, and this mania will start making sense.

An H100 costs approximately 30k. You can run a decent latest open model on it at 1000 tokens per second batched. Cost on open router is 4$ per 1m tokens.

That's about 120k revenue per year if there's demand. So far, there's unlimited demand.

You, as one person, can likely not make the logistics of this work. But this really works with the economies of scale.

Now, because of that everyone wants to buy GPUs and we don't have enough.

The math works much better with a newer GPU that produces more tokens per second and consumes less energy to do so, even if it costs double. So why would anyone buy an old one? Because demand is orders of magnitude more than supply.