"Transformative AI, existential risk, and real interest rates"

Over the last couple years the drive-by commentariat has come to a consensus that artificial intelligence will prove to be deflationary for the world economy. It is still too early to tell if this hypothesis is true as AI adoption has not yet reached levels that would prove up the guesses but the headline paper gives us clues to what to watch to tease out what may be one of the more important features of AI.

Via one of the authors of the paper,  Basil Halperin:

I am a postdoc at the Stanford Digital Economy Lab. In fall 2025, I’ll join the University of Virginia as an assistant professor of economics.

My research focuses on topics in monetary economics, macroeconomic growth, and AI.

I received my PhD in economics from MIT in 2024. In past lives, I worked as a data scientist at Uber and as a quant at AQR Capital Management. I did my undergrad at the University of Chicago.

If you have questions or comments about my research – or want to discuss research ideas – I’d love to talk with you (email, Twitter). 

December 2024

Abstract
We study how financial market prices can be used to forecast the likelihood of
transformative artificial intelligence. Transformative AI is a double-edged sword:
while advanced AI could lead to rapid economic growth, some researchers argue
that superintelligence misaligned with human values could pose an existential risk
to humanity. Theoretically, we show that either possibility would predict a large in-
crease in long-term real interest rates, due to consumption smoothing. We then use rich
cross-country data on real rates and growth expectations to show that, contrary to
other recent findings, higher long-term growth expectations do indeed cause higher
long-term real interest rates

....MUCH MORE (43 page PDF)
*Forbes, April 2023 - The Great AI Deflation Bomb

Reuters, June 2023 - AI’s deflationary winds will blow away profits 

Forbes, October 2023 - Cathie Wood Predicts AI Will Lead To Deflation And Drive Markets Higher

World Economic Forum, August 2024 -  Technology, including artificial intelligence (AI), must be deflationary to have a macroeconomic impact. It can reduce costs and prices and boost real incomes and demand, thereby creating new jobs and offsetting automation-driven losses.

December 2023 - OpenAI investor Vinod Khosla predicts AI will deflate the economy over the next 25 years

Money Metals, December 2024 - Will AI Cause Mass Deflation? 

LinkedIn February 2025 - AI Stands for Answer to Inflation: The Deflationary Power of Technology

And many, many more.

Our short term guess is a continued downtrend in reported year-over-year CPI due, not to AI, but to higher prints from last year falling off.

If interested see February 9's "Prepare for a Springtime CPI Collapse"

 

Regarding the inflationary impact of tariffs, President Trump seems, despite his "tariff is a beautiful, beautiful word" rhetoric to have decided on tariffs as the cudgel to beat the rest of the world into smaller trade surpluses rather than as a revenue generator or protectionist measure, lending some credence to our slightly snarky comment of seven weeks ago:

Now the good news is that after the tariff costs work their way through the economy the inflation effect will be transitory. And I have it from multiple very good authorities that transitory is nothing to worry about.

So who knows? We shall see. 

But the thought we could have deflation but higher interest rates is intriguing.