70 karmaJoined Jan 2023


I trade global rates for a large hedge fund so I think i can give the inside view on how financial market participants think about this. 

First, the essential claim is true - no one in rates markets talks about the theme of AI driving a massive increase in potential growth. 

However, even if this did become accepted as a potential scenario it would be very unlikely to show up in government bond yields so using yields as evidence of the likelihood of the scenario is, imho, a mistake. I'll give a number of reasons.

  1. Rates markets don't price in events (even ones that are fully known) more than one or two years ahead of time (Y2K, contentious elections in Italy or France, etc). This is generally outside participants time horizons but also...
  2. A lot can happen in two years (much less ten years). Major terrorist attack, pandemic, nuclear war to name three possibilities all of which would fully torpedo any bet you would make on AI, no matter how certain you are of the outcome.
  3. The premise is not obviously true that higher growth leads to higher real yields. That is one heuristic among many when thinking about what real yields should do. It's important to think about the mechanism here - if real yields are well below the economic growth rate then businesses are incentivized to borrow money to invest in projects which earn that growth rate. But this is really a return on capital phenomenon, not a growth rate phenomenon. It's much more applicable to a scenario of humanoid robots where you have to invest large amounts of money up front to yield a return in wage savings over time. Zero marginal cost software doesn't require the same kind of capital investment so there is no surge in borrowing necessary to attain the economic growth. 
  4. The heuristic of rates=growth is really better thought of as what rate is necessary to equilibrate savings and investment. So even a massive demand for investment funds can be offset by willing savers. In the case where gains from AI were evenly distributed it's plausible to say the income effect is such that people generally will  feel richer and thus want to consume more today (and will require a high interest rate to  push consumption from today to tomorrow). But in reality the wealth gains from AI will probably accrue to a small slice of the population. Rich people have very low marginal propensities to consume (and high marginal propensities to save). So a surge in wealth to rich people is generally thought to push interest rates down.
  5. Saving the most practical point for last: Interest rates in developed economies are heavily influenced by where the Fed wants them to be in order to fulfill their mandate of full employment and 2% inflation. If there were a huge speculative increase in interest rates in anticipation of a growth surge ten years from now that would torpedo current borrowing and thus the economy. So the Fed would fight back by cutting the overnight interest rate and, if necessary, purchasing bonds. The Fed's ammo is essentially unlimited and they would get their way and you would lose money.