There has been increasing concern about the trillions of dollars being pledged to generative artificial intelligence, whether as investments or purchases and sales of specialized hardware and software.
The huge amounts being borrowed and spent that aren’t supported by the much lower amounts of revenue have caused worries among many about how much this could affect not just the stock market but the broader economy.
And then there is a complicating issue of the circular structure of the investments. One company invests in another, which in turn buys products from the first. The entanglement is far more complicated because of the number of companies involved, the vast sums of money in play, and the insufficient amount of revenue coming from outside the system
It all seems legal and played within rules, but there is a risk that is similar to that of an old fraudulent practice called check kiting.
The Ancient Check
Many people have no idea what check kiting is because they don’t use checks and are used to near-instant transfers of funds. Let’s start from the basics for the growing number of people who have never used them.
Checks are a form of payment and money transfer with a long history, according to corporate treasury solutions firm Superior. The concept first appeared in Babylon as early as 5,000 years ago. Merchants used clay tablets as a way to promise payment. Traders could buy and sell goods without having to keep large sums of money on them.
Mesopotamia and Persia also used them more than 2,000 years ago. The Islamic world in the 9th century allowed merchants to deliver a promise of future payment as they traded along the Silk Road. Italian merchants and bankers were using them in the 13th century.
A New York merchant, Nicholas Van Dam, apparently wrote the first recorded check in the Americas in 1681. Their use grew through the 1800s in the United States and elsewhere, and they became a preferred form of payment after World War II.
In the U.S., consumers and businesses needing to make a payment would fill out a paper slip, which bore the originating bank’s routing and account numbers, with the payee’s name and amount to pay. The payor would hand the check to the payee, who could then deposit the check with their bank. Each bank processed checks through a complicated national system, presenting the check to the originating bank, which would then send back payment.
Exhausting, and a system that enabled some questionable actions, like check kiting.
An Old Form Of Fraud
Kiting is a form of fraud that allowed companies and people to create an illicit form of short-term credit because of the time it took for a check to clear the national payment system.
Check kiting referred to people who would write a check from one account with insufficient funds to deposit in another bank, making it look as though they had money. Sometimes they would keep a series of checks moving back and forth between the banks, basically juggling the insufficient balance.
In retail kiting, consumers would use bad checks to buy something, again looking at check clearing times to cover the fact that they didn’t have the money to pay for goods.
There is even securities kiting when firms don’t settle securities trades within the times required by the Securities and Exchange Commission.
What all these forms of fraud share is the inherent risk of timing hiding a lack of funds.
AI Kiting Isn’t Illegal But It’s A Worry
Again, the investments in AI don’t seem fraudulent in themselves, but much of the activity depends on that same risky timing. A puts money into company B, which then agrees to buy goods, probably with that same money, from A. Many of the companies are bringing in revenue, although they are not necessarily profitable, and yet pouring out huge sums.
This may be the next financial black swan. Perhaps the timing of everything will work out, but if not, this will come crashing down.
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