AI could drive up the neutral rate of interest in an economy
A great wave of Ai-led investment could leave us short of savings
is a Bloomberg Opinion columnist.
The US would build more real estate, using more energy in the process. Saudi Arabia, the UAE and many other places might do the same, boosting overall demand for investment yet higher.
Demand for space travel and satellite launches seems to be rising as well, partly because of AI. Software innovation has been driving a lot of progress on the hardware side. Less optimistically, Ai-driven warfare and drone combat may rise in importance, as already is true in Ukraine and the Middle East right now. This is bad news that will nevertheless drive further investment.
If enough of these trends come together in a short enough period of time, then real interest rates can be expected to rise. Demand to borrow and invest will go up, although savings will probably not rise proportionately, at least not in the short run. As societies age, they are spending down their accumulated wealth.
If AGI is realized, it would be akin to the arrival of billions of potential workers into the global economy at roughly at the same time. That is a complicated scenario. But it is plausible that, over a relatively short period, it could boost investment by 5% or more of US GDP. There would also bet major investments to help human workers deal with the resulting adjustments and reallocations of their efforts.
In practical terms: Expect a boom in the moving-van sector, as well as an expansion of government programmes for worker assistance. These and other similar forces will place further upward pressure on real interest rates.
Macroeconomics is never simple, as I said. So all this should be considered more a guess than a prediction. Still, it makes sense to be prepared for a reversal of the long-run trend of falling real interest rates—at least for several decades, until Ai-driven progress creates more wealth to replenish stocks of savings, lowering real rates once again.
In the meantime, be ready for change. Falling rates are not necessarily an iron law of economic history. Just as the Great Moderation was proved to be an illusion by the financial crisis of 2007-08, so may be the current ‘great moderation’—of real interest rates—prove to be an intermittent phenomenon.