Financial press is filled with panic attack about "circular finance" in AI. Nvidia invests in OpenAI, OpenAI buys Nvidia chips. Microsoft funds Anthropic, Anthropic rents Microsoft Azure. Oracle backs AI labs, labs fill Oracle datacenters.
"This is a bubble!" they cry. "Circular financing!" they warn. "Just like the dot-com crash!"
But here's what nobody is telling that : This is literally how banking has worked for centuries.
And banks are rewarded for it.
Let me explain why the "circular finance" criticism reveals more about financial illiteracy than about AI sustainability.
How Banking Actually Works: The Original Circle
Let's start with what everyone accepts as normal, healthy finance:
Traditional Business Loan:
- Bank lends you $500,000 to start a restaurant
- You use that $500,000 to buy equipment, inventory, lease space
- You operate the restaurant and generate revenue
- You pay the bank back $600,000 over 5 years (principal + interest)
- The bank's balance sheet grows by $100,000
Wait, isn't this circular?
Bank gives you money. You spend that money. You make money from what you bought. You give money back to the bank. Same money just moved in a circle, but the bank's numbers went up.
Nobody calls this a "circular finance scheme" or worries it's unsustainable. Why? Because we understand the mechanism:
- Bank provided capital
- Capital bought productive assets (kitchen equipment, inventory, house, education loan, corporate loan)
- Productive assets generated revenue
- Revenue exceeded costs
- Bank captured a portion of that value creation (interest)
Productive finance. Money circulates, but value is created in the process. The bank's growing balance sheet reflects real economic activity, not financial engineering.
How AI Finance Actually Works: The Same Circle
Now let's look at what everyone's panicking about:
AI Lab Financing:
- Nvidia invests/lends $50B to an AI lab
- AI lab uses $50B to buy Nvidia chips and datacenter capacity
- AI lab builds models and generates revenue from AI services
- AI lab pays Nvidia back through revenue, equity appreciation, or future purchases
- Nvidia's balance sheet grows
This is the exact same structure as banking.
Replace "bank" with "Nvidia" and "restaurant equipment" with "AI chips" and you have the identical circular flow:
- Nvidia provides capital
- Capital buys productive assets (GPUs, compute infrastructure)
- Productive assets generate revenue (AI services, API calls, subscriptions)
- Revenue exceeds costs (hopefully)
- Nvidia captures a portion of that value creation (returns, revenue)
Money circulates. Nvidia's numbers go up. But if the AI services generate real revenue from real customers paying real money, this is productive finance—not a house of cards.
Why the Circle Works (When It Works)
Both banking circular finance and AI circular finance succeed under the same conditions:
1. Productive Asset Purchase
Banking: Loan buys equipment that produces valuable goods/services
AI: Investment buys chips that produce valuable AI capabilities
2. Real Customer Demand
Banking: Customers pay for restaurant meals, manufactured goods, services
AI: Customers pay for AI capabilities, productivity gains, automation
3. Revenue > Costs
Banking: Business generates enough revenue to cover operations + loan repayment
AI: AI lab generates enough revenue to cover compute costs + investor returns
4. Risk-Adjusted Returns
Banking: Bank charges interest rate that compensates for default risk
AI: Nvidia prices investments/chips to compensate for business risk
When these conditions hold, the circle is sustainable. When they don't, it collapses—whether you're lending to restaurants or AI labs.
Real Question Isn't "Is It Circular?" But "Is It Productive?"
Entire circular finance critique misses the fundamental question: Are the acquired assets generating real value?
Bad circular finance (dot-com era):
- Lucent lent money to telecom companies
- Telecom companies bought Lucent equipment
- Equipment sat unused because demand was overestimated
- Telecoms couldn't generate revenue to pay back loans
- Lucent wrote off billions, 47 carriers went bankrupt
- The circle broke because the assets weren't productive
Good circular finance (banking forever):
- Bank lends money to businesses
- Businesses buy productive equipment
- Equipment generates goods/services customers want
- Revenue pays back loans
- Everyone prospers
- The circle continues because the assets ARE productive
AI circular finance (TBD):
- Nvidia/Oracle/Microsoft fund AI labs
- Labs buy compute infrastructure
- Infrastructure produces AI capabilities
- Customers pay for those capabilities (or don't)
- Revenue justifies infrastructure costs (or doesn't)
- The circle continues IF the assets are productive
What the Numbers Actually Show
Let's look at what OpenAI's commitments actually mean:
The "Scary" Numbers:
- OpenAI revenue projection 2025: $13B
- Infrastructure commitments: $300B (Oracle) + $90B (AMD) + $38B (AWS) = $428B
- Ratio: 33x annual revenue in commitments
But here's the context nobody mentions:
These are multi-year commitments, not immediate spending. If spread over 10 years, that's $42.8B/year. If OpenAI grows revenue at 50% annually (slower than recent growth), they hit $118B annual revenue by year 5.
Compare to restaurant financing:
- Restaurant revenue Year 1: $500k
- Bank loan: $500k (1x annual revenue)
- Equipment lifespan: 10 years
- If restaurant grows 20%/year, loan becomes 0.16x revenue by year 10
The structure is identical. The only question is: Will AI services revenue grow fast enough to justify infrastructure investment?
That's not a question about circular finance. That's a question about market demand and business fundamentals.
Why Nvidia Isn't "Playing Bank" Wrong
Critics say Nvidia is taking excessive risk by being both investor and supplier. But this is actually standard practice in capital-intensive industries:
Equipment Financing Examples:
- John Deere Financial lends money to farmers to buy John Deere tractors
- Caterpillar Financial lends money to construction companies to buy Caterpillar equipment
- Boeing Capital lends money to airlines to buy Boeing planes
- Tesla provides financing for Tesla solar installations
In every case:
- Manufacturer has capital
- Manufacturer lends to customers
- Customers buy manufacturer's products
- Products generate revenue for customers
- Customers pay back manufacturer
- Manufacturer's business grows
This is called vendor financing, and it's normal.
Nvidia providing capital for customers to buy Nvidia chips is the AI equivalent of John Deere financing farmers to buy tractors. The circle works if tractors generate farming revenue and chips generate AI service revenue.
The Real Risks (Which Have Nothing to Do With Circularity)
I'm not saying AI finance is risk-free. The real risks are:
1. Demand Risk
Will enterprise customers pay enough for AI services to justify infrastructure costs? This is the same risk restaurants face—will customers pay enough for meals to justify kitchen equipment costs?
2. Competition Risk
Will AI service margins get compressed by competition? This is the same risk any business faces when competitors enter the market.
3. Technology Risk
Will current infrastructure become obsolete before generating sufficient returns? This is the same risk farmers face when buying tractors that might be superseded by better equipment.
4. Execution Risk
Will AI labs successfully build profitable businesses? This is the same risk any loan carries—will the borrower execute their business plan?
None of these risks are about circular finance. They're standard business risks that exist in any capital-intensive industry.
Why the Criticism Persists
If AI circular finance is structurally identical to banking and vendor financing, why is everyone panicking?
Three reasons:
1. Scale Shock
The numbers are enormous. $428B in commitments sounds scary. But in context, it's not crazy:
- Global banking assets: $180 trillion
- Amazon's capital investments 2019-2023: $240B
- Meta's planned datacenter spend: Similar scale
- AI infrastructure is capital-intensive, like all infrastructure
2. Speed Shock
AI scaled incredibly fast. OpenAI went from research lab to $13B revenue in ~5 years. Traditional businesses take decades to reach this scale, so the financing mechanisms feel rushed.
3. Misunderstanding "Circular"
People see money flowing in a circle and assume it's artificial. But ALL productive finance is circular—money flows from capital providers to businesses to customers back to capital providers. That's called an economy.
The Actual Test
Whether AI circular finance succeeds or fails will depend on one question:
Do AI services generate enough customer value to justify the infrastructure investment?
If yes:
- Labs make revenue from real customers
- Revenue pays infrastructure providers
- Infrastructure providers profit
- Circle continues sustainably
- Just like banking for centuries
If no:
- Labs can't generate sufficient revenue
- Infrastructure providers don't get paid back
- Investments written off
- Circle breaks
- Just like failed business loans
This isn't novel financial engineering. It's not a bubble indicator. It's not concerning because it's circular.
It's just finance. The same finance that's funded every capital-intensive industry from railroads to restaurants to rental cars.
What This Really Reveals
The "circular finance" panic reveals something uncomfortable: Most people don't understand how productive finance works.
They see money flowing in circles and panic because they think money should flow in straight lines. But productive economies have ALWAYS been circular:
- Banks lend to businesses
- Businesses buy equipment
- Equipment generates goods
- Customers buy goods
- Revenue pays back banks
- Banks lend more
The circle is a feature, not a bug. It's called economic growth.
The question isn't "Is AI finance circular?" (Yes, like all finance)
The question is "Is AI infrastructure productive?" (Are customers willing to pay for AI services?)
If you're worried about AI circular finance, ask yourself: Are you also worried about every business loan a bank makes? Because structurally, they're the same thing.
If the answer is no, then your concern isn't about circular finance. It's about whether you believe AI services will generate sufficient customer demand.
That's a valid concern. But let's be honest about what we're actually debating.
The Bottom Line
Banks have done circular finance for centuries and we reward them for it. They lend money, borrowers buy productive assets, assets generate revenue, revenue pays back loans, banks profit.
Nvidia is doing the same thing with AI labs. They provide capital, labs buy chips, chips generate AI services, services generate revenue, revenue flows back to Nvidia.
The structure is identical. The mechanism is identical. The only question is execution: Will AI services generate enough demand?
If yes, this is productive finance that creates value. If no, it's failed investment that destroys value.
But calling it "circular finance" as if that's inherently problematic just reveals you don't understand how banking—or business—has ever worked.
The circle isn't the problem. The circle is how capitalism functions.
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