The impact revolutionary technological breakthroughs have on interest rates is not intuitive. A common view is that productivity enhancements lower the cost of goods and service, pushes down inflation and results in a lowering of interest rates. However, some economists argue that in fact it leads to massive capital investment, increasing the demand for borrowing and pushing up rates.
This second argument was put forward by economist Tyler Cowen. Writing on Bloomberg, he argues that once businesses realise the potential of AI, they will invest heavily to take advantage. Initially, huge amounts will be spent on data centres as tech companies try to meet their customers computing demands – which will need to be financed by increased borrowing.
However, Cowen also says there would be second-order effects as AI allows scientists to accelerate R&D. He uses the example of water desalination and suggests that if AI allowed the process to become cost-effective people would be able to develop previously uninhabitable parts of the world, such as the deserts of California, Arizona and Saudi Arabia.