Circular Financing Is The AI Boom's Mortgage Machine

Wall Street keeps calling the AI boom a chip story. Only half of that is right.

The other half is a financing machine that is starting to look a little too much like the last time America came up with 'creative financing'... Mortgage Backed Securities anyone?

I am talking about circular financing. And if you are holding stocks, you need to understand what's going on right now.

What is Circular Financing?

Here is the simple version.

Company A puts money into Company B. Company B turns around and spends a big chunk of that money buying chips, cloud, or construction from Company A. Company A books the sale as revenue. The stock market cheers "demand." Company A has more cash and a hotter story, so it funds the next round.

That is circular financing. Money leaves as investment or credit and comes back as reported sales.

It is not always a scam. Car makers have financed dealers for decades. Jet makers finance airlines. Vendor finance is an old tool. The real question is whether there's any actual growth at all here. I mean, if you're giving a company money to buy your product from you... how is that revenue? I mean, if I hand my wife $100 and she gives it back to me, did I just make more money? That's what this feels like.

Why this rhymes with mortgage backed securities

Mortgage-backed securities did not invent home loans. They packaged loans, sliced risk, and sold the slices as if the package made the underlying safer. When home prices stopped rising and borrowers stopped paying, the package became the crisis.

Circular financing packages something different: apparent demand.

A supplier-funded purchase can look identical to a cash-paying customer on the income statement. Both show up as revenue. Only one proves an independent buyer wrote a check without the seller's help. When the buyer is also the investee, the friend, and sometimes the borrower against the seller's own hardware, you have a closed club.

The International Monetary Fund has already flagged the risk. When the same firms sit as investors, suppliers, and customers inside one "AI circle," a shock to a single name can spill through the whole web. The Bank for International Settlements put circular AI financing near the top of its global risk list for the same reasons: poorly disclosed private deals, multi-year purchase commitments, and assets that can get pledged more than once.

This is another "complex financial tool" that's really simple. It's simply a lie.

How the AI club runs the loop

Nvidia (NVDA) invests in, or helps unlock capital for, AI labs and "neo-cloud" operators that rent GPU capacity. Those firms fill racks with Nvidia hardware. Nvidia books the sale. On the latest earnings cycle, the company's finance chief told analysts that demand from labs Nvidia backs with its balance sheet is headed toward roughly a quarter of next year's business. Nvidia has put on the order of $50 billion into those labs and lined up financing platforms with big asset managers aimed at more than $500 billion of outside capital for the buildout.

Microsoft (MSFT)'s relationship with OpenAI works the same geometry: capital and cloud on one side, massive multi-year Azure spend on the other. Amazon (AMZN) and Google (GOOGL) have run versions with Anthropic. CoreWeave sits in another knot: Nvidia equity and capacity backstops, debt often tied to GPU collateral, and hyperscalers booking long compute contracts as operating costs instead of building every watt themselves.

None of that means the chips are fake. It means a meaningful slice of "AI demand" is financed demand inside a friend group.

We have seen the failure mode

In the late 1990s telecom boom, Lucent and Nortel lent money and credit to young carriers so those carriers could buy Lucent and Nortel gear. Sales looked unstoppable. When the carriers ran out of runway, the equipment makers ate bad loans and watched "demand" vanish. Lucent's vendor-finance book ballooned into the multi-billion range before the cleanup. Nortel never recovered its boom-era glory.

Supplier-funded growth is fragile growth. It works while the story holds. It collapses into the supplier's own balance sheet when the story breaks.

My take

As for me, circular financing is the tell under the AI stock market right now.

I respect the builders. Real models need real factories. Power, land, memory, and advanced chips are scarce for a reason. Calling every loop fraud is lazy. Treating every GPU shipment as pure end-user cash is lazier.

If AI monetization stays strong, these loops look like smart supply locking. If monetization slips, credit tightens, or one keystone lab stumbles, the same loops become amplifiers. Round-trip revenue starts to reverse. Credit spreads usually crack first.

For a self-directed investor, the useful work is boring. Follow free cash flow at the hyperscalers, not just revenue. Read who funds whom when a mega deal hits the wires. Prefer proof from customers who are not also on the seller's cap table. A closed financing club is not a wide-open market.

Bottom Line

Circular financing is the AI boom's demand-packaging machine: useful until the loop is the only thing holding the growth story together.