AI (Artificial Intelligence) may have an unexpected influence on interest rates.
• As advancements in artificial intelligence continue to accelerate, questions arise about its potential impact on the economy, asset prices, and, particularly, interest rates: will AI likely trigger an increase or decrease in interest rates?
• You might assume that economists could easily handle such a straightforward question. However, both macroeconomics and AI are intricate fields. Nevertheless, here’s my bold prediction: real interest rates, adjusted for inflation, will experience an upward trend for a significant period.
• Traditionally, it’s believed that interest rates tend to decrease as prosperity and productivity increase. This viewpoint is understandable, given that real interest rates have generally declined over the past four decades.
My somewhat paradoxical forecast is based on two key considerations.
• Firstly, in practical terms, a genuine AI boom or the advent of general artificial intelligence (AGI) would likely drive up demand for capital expenditures (capex) significantly.
• Secondly, from a theoretical standpoint, capital productivity plays a crucial role in shaping real interest rates. If AI substantially enhances capital productivity, it follows that real interest rates should also rise.
• Consider the investments pouring into the AI sector. The pursuit of higher-quality semiconductor chips is relentless. These investments are complex and costly. Yet, the appetite for investment won’t stop there. The deeper AI penetrates into our lives and business strategies, the greater the demand for computational power will be. This, in turn, will necessitate a considerable expansion of energy infrastructure.
• These investments come with hefty price tags. Major data centers already consume energy equivalent to several large nuclear power plants to meet their projected energy demands.
• However, this may just be the beginning of the investment surge. AI is already driving progress in scientific discovery rates, and this trend is expected to continue. Imagine if artificial intelligence makes water desalination economically viable in many regions around the world. Suddenly, there would be a surge in demand for developing new areas of land, leading to increased construction activity and energy consumption. Countries like Saudi Arabia and the UAE could follow suit, further boosting the overall demand for investments.
• Additionally, the demand for space travel and satellite launches appears to be on the rise, partly due to advancements in artificial intelligence. Although less optimistic, the value of AI-driven warfare and drone technology could also increase, as evidenced by recent conflicts in Ukraine and the Middle East. Despite the negative implications, this would still stimulate further investment.
• If these trends converge over a relatively short period, we can expect real interest rates to rise. This would lead to an increase in demand for loans and investments, although savings may not grow proportionally, at least in the short term. As populations age, they tend to draw down their accumulated wealth.
• If AI becomes a reality, it could be akin to injecting billions of potential workers into the global economy simultaneously. This is a complex scenario, but it’s entirely plausible that this could drive up investment by 5% or more of a country’s GDP within a relatively short timeframe. Significant investments would also be needed to help workers adapt to the changes and reallocate their efforts accordingly.
• In practical terms, we should anticipate a boom in the trucking industry, as well as expansions in government assistance programs for workers. These and similar factors will continue to exert upward pressure on real interest rates.
• As I’ve mentioned, macroeconomics is never straightforward. Therefore, we should regard all of this as more of a speculation than a precise prediction. Nonetheless, it would be prudent to prepare for a shift in the long-standing trend of declining real interest rates – at least for several decades – until the progress driven by AI generates more wealth to replenish savings, thereby once again lowering real rates.
• In the meantime, brace yourself for change. The decline in interest rates is not necessarily an immutable law of economic history.
BT
