Section I
Long-term real rates would be high if the market was pricing advanced AI
Real interest rates reflect, among other things:
- Time discounting, which includes the probability of death
- Expectations of future economic growth
This claim is compactly summarized in the “Ramsey rule” (and the only math that we will introduce in this post), a version of the “Euler equation” that in one form or another lies at the heart of every theory and model of dynamic macroeconomics:
While more elaborate macroeconomic theories vary this equation in interesting and important ways, it is common to all of these theories that the real interest rate is higher when either (1) the time discount rate is high or (2) future growth is expected to be high.
We now provide some intuition for these claims.
Time discounting and mortality risk. Time discounting refers to how much people discount the future relative to the present, which captures both (i) intrinsic preference for the present relative to the future and (ii) the probability of death.
The intuition for why the probability of death raises the real rate is the following. Suppose we expect with high probability that humanity will go extinct next year. Then there is no reason to save today: no one will be around to use the savings. This pushes up the real interest rate, since there is less money available for lending.
Economic growth. To understand why higher economic growth raises the real interest rate, the intuition is similar. If we expect to be wildly rich next year, then there is also no reason to save today: we are going to be tremendously rich, so we might as well use our money today while we’re still comparatively poor.
(For the formal math of the Euler equation, Baker, Delong, and Krugman 2005 is a useful reference. The core intuition is that either mortality risk or the prospect of utopian abundance reduces the supply of savings, due to consumption smoothing logic, which pushes up real interest rates.)
Transformative AI and real rates. Transformative AI would either raise the risk of extinction (if unaligned), or raise economic growth rates (if aligned).
Therefore, based on the economic logic above, the prospect of transformative AI – unaligned or aligned – will result in high real interest rates. This is the key claim of this post.
As an example in the aligned case, Davidson (2021) usefully defines AI-induced “explosive growth” as an increase in growth rates to at least 30% annually. Under a baseline calibration where σ=1 and ρ=0.01, and importantly assuming growth rates are known with certainty, the Euler equation implies that moving from 2% growth to 30% growth would raise real rates from 3% to 31%!
For comparison, real rates in the data we discuss below have never gone above 5%.
(In using terms like “transformative AI” or “advanced AI”, we refer to the cluster of concepts discussed in Yudkowsky 2008, Bostrom 2014, Cotra 2020, Carlsmith 2021, Davidson 2021, Karnofsky 2022, and related literature: AI technology that precipitates a transition comparable to the agricultural or industrial revolutions.)