tl;dr: - In Tyler Cowen's opinion, **strong AI will increase real interest rates** because AI increases the productivity of capital. (Ironically, the same Cowen coined "Cowen's Third Law", which states that [all propositions about real interest rates are wrong](https://marginalrevolution.com/marginalrevolution/2015/04/tyler-cowens-three-laws.html).) - Metaculus seems to agree with Tyler, betting that real interest rates will [increase by >5%](https://manifold.markets/jgyou/will-strong-ai-raise-or-lower-inter). - Total capex in the US is ~$5T/year and 18-25% of GDP. Megaengineering projects are plausibly a meaningful chunk of that. --- Real interest rates have been [mostly on the decline](https://fred.stlouisfed.org/series/REAINTRATREARAT10Y) for 40 years: ![[Pasted image 20240604174832.png]] *This plot is treasury yields minus measures of inflation (CPI, inflation swaps, and survey-based measures of inflation expectations)* The conventional wisdom (according to [Tyler](https://archive.is/Z0DsD)) is apparently that rates fall as wealth increase. This is because it's safer for banks to lend to people with savings, so they can afford to drop rates. **One key impact of AI is that it'll increase the productivity of capital**. That'll increase the demand for capital. And demand for capital is an important determinant of real interest rates: the higher the demand to borrow capital, the higher the price of that capital. (Though see [[AI creates deflationary abundance and inflationary capital demand simultaneously]] for the tension between AI's deflationary effects on goods and inflationary effects on capital.) We're currently seeing massive investment because of AI. If you *really* believe in scaling laws, then by the end of the decade you would not be surprised to see investments on the scale of: - Trillion-dollar datacenters run by states - Millions of humanoid robots - Massive new energy infrastructure to power it all The total capex of the United States was $5.63T in 2022, and capex is typically around 20% of total GDP. Any of these projects would be meaningful chunks. #Question: What is the OOM of investment that would measurably impact real interest rates? To contextualize with a historical megaengineering project: the Manhattan Project cost about 0.4% of GDP spread out across 4 years. That implies 0.1% GDP per year, which implies 0.5% of capex each year. I doubt this had an isolatable effect on real interest rates, though. [Gross capital formation](https://data.worldbank.org/indicator/NE.GDI.TOTL.CD?locations=US&name_desc=true) is a good measure of new investment (defined [here](https://www3.nd.edu/~cwilber/econ504/504book/outln11b.html)): ![[Pasted image 20240605121127.png]] [Source: the World Bank](https://data.worldbank.org/indicator/NE.GDI.TOTL.CD?locations=US&name_desc=true). I'd prefer a measure that were adjusted for inflation using the producer price index (although it's "doubtful that this index is as accurate as the consumer price index" according to [/r/AskEconomics](https://www.reddit.com/r/AskEconomics/comments/10f3w41/what_can_gross_fixed_capital_formation_in_dollars/)). ![[Pasted image 20240605121114.png]] [Source: the World Bank](https://data.worldbank.org/indicator/NE.GDI.TOTL.ZS?contextual=default&end=2023&locations=US-XU&most_recent_year_desc=false&start=2000&view=chart) #Question: before AI, capital "self-replicates" because of compounding interest. After AI, capital "self-replicates" because it's *intelligent* and can participate in the economy. Before AI, real estate is considered a hedge against inflation. After AI, is it still useful to diversify into "dumb" capital like land? The argument for is that land will always be scarce and rise in value. The argument against is that returns to investing in GPUs that are intelligent will be driven to zero with sufficient investment. But that kind of underestimates intelligence, doesn't it? [[Should you diversify into real estate in the age of AGI?]] #Research Philip recommended the Price of Money, which is an entertaining history of interest rates. Here's a [glowing review](https://blogs.cfainstitute.org/investor/2022/06/23/book-review-the-price-of-time/). The thesis: there's a "natural rate of interest" (r*) below which we have inflation. However, central banks around the world have been keeping rates artificially low. This leads to malinvestment, bloated asset prices, financialization, and zombification (companies staying alive that ought to die). Comments on [this Twitter thread](https://x.com/jasoncbenn/status/1798439735125479557).