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The Squeeze: Why AI and nuclear fusion will increase interest rates

Growing threats to humanity deter people from saving
January 19, 2023

The Squeeze: our weekly think piece to help you grow your investment knowledge

Making long-term predictions about the fate of humanity is notoriously difficult. The most common way political scientists “forecast” is to extrapolate out curves indefinitely. It was this method that led to Paul Ehrlich publishing his embarrassingly inaccurate book The Population Bomb in 1968.  

He forecast that hundreds of millions of people would die from starvation by the end of the century. But the trends he observed didn’t continue. Food production grew, fertility rates fell, and across the world people are now better fed than any point in human history. In 2019, global deaths from malnutrition were just over 200,000, down from over 600,000 in 1990. Ehrlich predicted the population of the US to be 22.7mn in 1999, in reality, it was 279mn.

Despite our historical incompetence at seeing decades into the future, people continue to try. A speculative essay by Stanford’s Trevor Chow and MIT’s Basil Halperin, suggests markets are massively under estimating the impact of artificial intelligence (AI) on long-term real interest rates.

The theory is that AI will either provide a massive boost to productivity or create a new existential threat to humanity. In both instances this increases real interest rates. Some believe AI will have a similar impact on productivity as the Industrial Revolution. Historically there has been a strong correlation between productivity growth and real interest rates. When people think they will be richer in the future they no longer feel the need to save thus interest rates have to rise to encourage them. Harvard's Paul Schmelzing shows this historical relationship with his graph below.

Existential threats to humanity have the same impact on savings. If you think the world will end in the next decade then you are not going to save your money. Proving this is tricky because there is no metric for global existential angst. Instead, Chow and Halperin referenced a study in Malawi to see how individual mortality risk affected savings. The paper showed that when AIDs medication was widely distrusted, both life expectancy and savings rose.

In recent history, we have experienced Covid-19, a war in Europe and rising tensions between the two most powerful countries in the world. Existential risk is rising. Meanwhile, US scientists have produced net positive energy from a nuclear fusion reaction for the first time in history and OpenAI’s ChatGPT is by far the most sophisticated piece of AI consumers have ever had access to. A future of cheap energy and intelligence is coming into view.

In the past two years, the potential threats to humanity have grown but so have the opportunities. The UK 50-year gilt yields is already starting to reflect this having risen from 1 per cent to 3.3 per cent in the past 12 months. In the best and worst case scenarios rates will have a lot further to rise.