The market has been consumed in recent weeks by concerns about tech stock valuations and the emergence of an AI bubble. But for Robert Rubin, the former U.S. Treasury secretary and former Goldman Sachs co-chairman, the market’s complacency goes much deeper than the current debate over whether a handful of growth stocks can sustain the market’s highs. In his view, debates about the current AI boom and whether it is similar to the financial crisis or the dot-com bubble are beside the point. October 1987, and the event known as “Black Monday,” is the historical comparison he wants markets to focus on.
Mr. Rubin has been outspoken about the risks to the U.S. economy related to rising government debt, and he expanded on those concerns Wednesday at the CNBC CFO Council Summit in Washington, D.C.
Recent estimates from the Congressional Budget Office show that public debt in fiscal year 2025 will be 99.8% of gross domestic product. This is double the historical average of 51% over the past 50 years. But Rubin said the long-term average masks a recent worsening trend. In 2000, the same percentage was 30%.
The CBO predicts an additional 20 percentage points increase over the next 10 years, but Rubin sees this forecast as optimistic. “The more realistic estimate is quite high,” he says.
He cited a study by the Yale Institute for Budget Studies that predicts the debt-to-gross domestic product (GDP) ratio, excluding tariffs, will be close to 130-140%.
The effects of rising debt are only just beginning to be felt. He said curbs on public investment and national security spending and the impact on interest rates were already likely to be linked to the debt burden. And to a very limited extent, business confidence may also have taken a hit, Rubin added.
But Rubin said he believed the “ultimately serious consequences” were “very likely out there,” and pushed him back to October 1987.
“When I talk to market participants, I say there’s one date to keep in mind: October 19, 1987,” Rubin told CNBC’s senior finance and banking reporter Leslie Picker at the summit.
He said that for several years before the October 1987 crash, the situation was considered to be “so excessive that nothing was happening in the market.”
As a result, “people stopped listening,” Rubin said.
and, Dow Jones Industrial Average On October 19, 1987, it fell more than 22% in one day.
A scene at the Pacific Stock Exchange on October 19, 1987, the day the Dow Jones Industrial Average fell 509 points. At the time, the decline represented more than 22% of the index.
San Francisco Chronicle/Hearst Newspapers | Hearst Newspapers | Getty Images
The market’s most outspoken voice on the AI bubble is short seller Michael Burry, who recently closed his hedge fund, launched a newsletter detailing his views, and warned on Wednesday that the AI stock bubble could unwind within two years.
On that infamous October day, Rubin said there was no particular action that caused the crash other than “the market was just out of sync with reality.”
In the current economic environment, Rubin believes it is “very likely” that actions will ultimately have to be taken with negative consequences, but he is primarily concerned with debt, not AI valuations, and how governments are trying to “inflate” the problem, such as by monetizing debt to fund new bond purchases. “But it’s impossible to predict the timing,” Rubin said. “And you might be able to keep doing unhealthy things, but that seems to me to be a very unhealthy bet,” he added.
Rubin said the AI issue itself is complex, and the large investments currently being made in data centers “certainly pose some obvious risks,” especially for a company like OpenAI that doesn’t have the existing revenue or profit model of a public tech giant like Alphabet.
“We don’t know how likely there is to be a very difficult outcome, but it’s a very complex situation and we need to really understand this issue,” Rubin said.
He sees parallels between AI and America’s larger fiscal problems, in that the political system is not dealing with the consequences of what is likely to happen. Estimates that job losses to AI could reach 50% of white-collar professions don’t have to be exactly right or wrong, he said, but need to convince us that “the risk of human labor being replaced by AI is so great that we should be addressing it, and we’re not.”
Mr. Rubin said that when he ran Goldman Sachs, he always told his staff that they needed to be “actively engaged and fully engaged,” but now he has a cautious bias because there are many risks from debt to geopolitics, adding: “There are a lot of things that can go wrong, and I don’t think the political system is dealing with them very well.”
A combination of new taxes and spending cuts would be needed to reduce the current deficit-to-GDP ratio by 2.5 percentage points to about 7%, according to his estimates from the Yale Budget Institute. To reduce this ratio to 4.5%, it would be appropriate to cut half of 1% from expenditures and add 2% from tax revenues. That would essentially stabilize the debt-to-GDP ratio at its current level of 100%, Rubin said. “And we’re going to be in a much better position for the economy going forward.”
While the Trump administration has focused on economic growth prospects as a cornerstone of its plan, Rubin said getting out of this debt and deficit problem will require growth rates that are “astronomically larger than is realistic.”
“Maybe it will never happen,” he said. “Maybe we just keep going.”
But Rubin said he tends to have a conservative bias based on trying to be disciplined about risk and reward, which leads him to conclude that all risks are less severe and materialize in more severe ways. The ultimate risk, he says, “is probably already pretty high, but who knows. It could be tomorrow or in the future. I don’t think there’s any way to make that determination.”
Mr. Rubin sees the market becoming too complacent, but ultimately he says there will be nothing more to say and “when it happens” will be all that matters.
