AI could raise the neutral rate of interest in the economy.

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If general artificial intelligence (AGI) becomes a reality, it will be like billions of potential workers arriving in the global economy around the same time. The charging of borrowing rates over time has no theoretical basis. A big surge in AI investment could lead to a global savings shortage. As artificial intelligence (AI) advances, questions arise about how AI will affect the economy, asset prices and, most importantly, U.S. interest rates: is AI more likely to make them rise or fall? One would think that economists should have a simple formula to solve such a straightforward question, but macroeconomics and AI are complex. Nevertheless, I have a bold prediction: real or inflation-adjusted rates will rise and this will continue for a long time.

It is generally accepted that rates fall as wealth and productivity in the economy increases.

This is easy to understand as real interest rates, especially in the US, have been falling for the past four decades. As far as theory is concerned, lending becomes safer over time, even with higher savings. So why might these mechanisms stop working? My counterintuitive prediction rests on two important circumstances. First, in practice, if there is a true AI boom or the emergence of general artificial intelligence (AGI), the demand for capital investment will be extremely high.

Second, from a theoretical perspective, capital productivity is a key determinant of real interest rates. If capital productivity increases significantly because of AI, real interest rates should also increase. Think about capital investment in an AI world. The rush to produce more and more high-tech semiconductor chips will continue. These investments are not easy or cheap. But the demand for investment won't stop there. The more AI is integrated into lives and business plans, the greater the demand for computing power will be. This will lead to a significant expansion of energy infrastructure. Again, this is not a cheap investment. For example, the US state of Northern Virginia is now facing a major dilemma in this area, and it's not just because of AI. The region is home to large data centers and now requires the creation of several large nuclear power plants to meet the needs of the region's population.

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