Bank of England Governor Mark Carney says easier monetary policymay be needed to help a slowing economy in the wake of the U.K.'s vote to leave theEuropean Union. This response is straight from the handbook ofmodern central banking—a favorite with the Federal Reserve, theBank of Japan, and just about every other central bank. But itmight be the wrong reaction.

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I argued last month that ever-lower interest rates might bedestroying whatever faith businesses and consumers have left in theeconomic outlook. Cheap money keeps zombie companies alive,trapping capital in unproductive endeavors that would otherwisedie. And negative interest rates are unprecedented, and look a lot likeallowing doctors to experiment on their patients. The feedback Igot suggested another compelling reason that higher rates might bea better approach: demographics.

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If you look at the age balance of the global population betweenold and young people, the over-65s account for almost 9 percent ofthe total, a figure that's been rising steadily and has doubledsince the start of the last decade. For the euro region, thiscohort accounts for closer to 18 percent; in the U.S., more than 15percent of the population is past standard retirement age, up from12.5 percent a decade ago.

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Retirement-age people have not only increased in number, theargument goes, they also have accumulated wealth, having livedduring the halcyon days of luxuries such as affordable housing anddefined-benefit pensions. And they have a propensity to spend theincome they get from those savings.

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But with interest rates close to zero, there is no income tospend. Moreover, they're too smart to touch the capital in theirnest eggs. So the more central banks drive down interest rates, theless discretionary spending the oldies can afford. Instead ofspurring investment and demand, loose monetary policy may bekilling consumption by punishing baby boomers.

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Those lower-for-longer policies aren't just erasing the savingsrates on cash in the bank. Retirees are getting killed if they havefollowed the standard advice of financial advisers and moved theirpensions to the supposed safety of fixed-income funds and out ofequity funds. The 10-year U.S. Treasury yields just 1.4 percent,down from 2.4 percent a year ago and compared with an average inthe last decade of 4.3 percent. In the 1990s, these securities hadreturns of more than 8.5 percent. In short, lower bond yields meanfewer cruises and Winnebagos—bad news for the economy.

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Those approaching retirement are also likely to be influenced bylow interest rates. Even if they haven't done the math on how muchthey'll need to spend their days on the golf course, they probablysense that they must save more, not less, which, in turn, furtherreduces discretionary spending. Indeed, even with interest rates atrecord lows, the U.S. savings rate as a percentage of disposableincome is above its long-term average, and reached 6 percent at theend of the first quarter, its highest since the end of 2012.

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Drew Matus, the deputy chief U.S. economist at UBS in New York,e-mailed me to point out an argument he made in April 2015 thatappears to be coming true:

Having too low of an interest rate can be as disruptive togrowth as can a rate that is too high. Theory would suggest lowerrates will boost the economy, driving consumptionand investment higher. That hasn't happened in the post-crisisenvironment. Savings rates have risen and investment has been weak.Zero rates could be part of the problem rather than the solution:low rates could boost savings and inhibit investmentdecision-making by companies, reducing capital spending.

As my fellow Bloomberg View columnist Narayana Kocherlakotapointed out, the older generation has little incentive to supportinfrastructure spending on projects that typically take years todeliver any benefit to the economy. So the gray vote is unlikely tojoin the clamor for fiscal stimulus. But if central banks took theleap and raised interest rates, they'd be giving savers a payincrease.

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The idea that raising interest rates might in turn boostconsumption and lead to faster inflation is called Neo-Fisherism byeconomists. There's no question that it's counter-intuitive. Inthat theoretical handbook of modern central banking I referred toat the start of this article, it would be deep in the“Unconventional Policies” chapter. But as interest rates arenegative and European Parliament members are petitioning theEuropean Central Bank to consider dropping helicopter money ontothe economy, the suggestion that interest rates need to rise torescue the economy may not be so outrageous after all.

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This column does not necessarily reflect the opinion of theeditorial board or Bloomberg LP and its owners.

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Copyright 2018 Bloomberg. All rightsreserved. This material may not be published, broadcast, rewritten,or redistributed.

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