Client Update - 7th July 2023

There is a popular narrative that many of our woes have been caused by low interest rates, in place since 2008. The birth of crypto and inflation are all societal ills blamed on central banking policy. But could it be that these rates also brought about the biggest innovation since the internet?

Over the last fifteen years, with low interest rates and minimal returns from bonds, investors put their money into increasingly speculative investments. Between 2009 and 2021, the total amount of US venture capital investment rose more than 10 times from $29bn to more than $300bn, according to Statisa. Intuitively, with so much money flowing towards the technology sector we should have expected lots of new life improving products. Instead, the eyeball test suggested we were stagnating. Food delivery and ride hailing companies competed to make our lives more convenient but still relied heavily on human labour. Despite massive scale, Deliveroo, Just Eat and Uber still don’t make statutory profit.

There have been plenty of other signs of excess. Earlier this month a robot pizza making company that raised half a billion dollars shut down. Last year, institutional money from some of the world’s leading investors valued crypto exchange FTX at $32bn before it was proven to be a fraud.

However, the emergence of ChatGPT has turned this story on its head. AI is a story of big companies throwing a lot of money around and the technology is now being integrated into everything from video game development, to search engines and advertising. And it is not just being used for creative endeavours, its use in drug discovery could also have a significant impact on our health and extend our time on this planet.

Interestingly, you could take a view that without low interest rates this breakthrough would not have been possible – at least on this time frame. If tech companies received a healthy return on their cash from risk-free bonds they would not have had to search elsewhere for ways to invest their cash. However, this wasn’t an option, so instead they invested billions in research and development on a technology that wasn’t guaranteed to succeed.

The slight irony is that this emergence has happened just as interest rates are rising and venture capital funding is drying up. However, if we look at the number of patents filed, in terms of AI specific patents, there were just 10,000 filed globally in 2017 but 141,000 in 2021, according to Our World in Data. In 2020, Microsoft, Alphabet, Amazon and TSMC were all in the top 20 US companies for patents granted, report the Intellectual Property Owners Association. Their shareholders have all been rewarded this year for their positions at the leading edge of AI – whether it is chip design, manufacturing or improved software.

Patents are an often-maligned measure of innovation. Increased volume does not mean increased quality, after all, someone would have filed for a patent for their pizza baking robot. However, there is yet to be a better measurable indicator of innovation. Yes, loads of daft things could be patented but only a few need to work for there to be a significant societal impact.

You can certainly debate whether the increased income inequality and unaffordable housing market was worth it, but it’s hard not to connect the dots between loose monetary policy and the billions of dollars needed to bring AI to society. Of course, exactly how AI will help us or hinder us is still up for debate. Do have a good weekend.