Real rates show AI hype is premature
The guest argued that financial markets are not pricing in imminent transformative AI, as long-term real interest rates remain within historical norms rather than spiking to reflect expected hyper-growth.
The argument
If markets anticipated transformative AI (e.g., 30% GDP growth), consumption smoothing and massive capital demand would drive real interest rates (r-star) dramatically higher. While the 30-year real rate is elevated at 2.75%, it does not reflect the extreme right-tail growth scenarios envisioned by Silicon Valley optimists.
The thesis, stress-tested
✓ What validates it
- ✓A sharp, structural rise in the 30-year real interest rate well beyond historical norms
- ✓Continued record-breaking debt issuance by tech firms to fund AI capital expenditures
▸ Risks discussed
- ▸Monetary policy inflation-fighting distortions can obscure the true natural rate of interest
- ▸The transition to transformative AI may have a longer horizon not captured in current 30-year bonds
Hear it yourself
"The income has to go somewhere. Someone has to be spending Yeah. What's produced. Income equals output. Yeah. Absolutely. And there was an individual named Alex IMS who had a great piece that responded to it. He had a substack before the link to it. And he actually took the argument to a model. In fact, he took it to several models. And if I recall correctly, he took it through three different models. One model is where you have a big income shift from labor to capital, and then the follow-up is, well, labor has a higher marginal propensity to consume than the owners of capital."
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