The Looming Impotence of Central Banks
Charlie Nelson
September 2002
In the next few years the "baby boomers", the large generation born in the 1950's and 1960's, will grow old. As they do, their sheer numbers and their different attitude to age will create new markets in the world's rich countries. Yet business remains largely obsessed with youth. Many companies seem blind to the fact that their customers are greying.
The Economist August 10th 2002
Central Banks too seem blind to these facts. Older consumers tend to prefer higher, rather than lower interest rates because they are more likely to be net recipients of interest rather than net payers. Older people spend more when interest rates are high. For more information on this, see my research paper A perverse reaction to interest rates. The older age groups are growing much faster than those who are net payers of interest, people in their 30's and early 40's.
So, I sent this letter to The Economist:
Your excellent article “Over 60 and overlooked” points out that many companies seem blind to the fact that their customers are graying. But the same could be said about central banks.
Not only do people over the age of 55 constitute an increasing proportion of spending power in countries like Japan, USA, UK, and Australia, they are also more likely to be net recipients of interest rather than net payers of interest like people in their 30’s.
Hence, older people spend more when interest rates are high and their rapidly swelling numbers is increasingly making monetary policy impotent at influencing aggregate consumer spending. When interest rates are low, older people cut back on spending because their income is low and they are unwilling to borrow or to run down savings.
This is the reason for the interest rate trap being experienced in Japan and emerging in USA and other countries. When interest rates have hit very low levels, the only way to boost consumer spending is to raise interest rates. The world economy needs central banks to urgently review their strategy.
Predictably, The Economist has not published this letter. Perhaps they think my research is bunkum (I sent them a copy of my paper nine months earlier and it was greeted by silence). Perhaps they think that it is not an important issue now and it can be swept under the carpet for a few more years. Perhaps they do not want to upset their friends at the central banks.
As is often the case, The Economist is about a decade behind many insightful researchers. In 1993, Harry Dent published his book "The Great Boom Ahead" which recognised that a persons spending on discretionary items tended to peak in their late 40's. He used this information in conjunction with the ballooning population size reaching that age to correctly predict a boom in consumer spending in the US during the 1990's. This was at a time when most economists were pessimistic (see Persistent Pessimistic Predictions of the US Economy).
I have been making similar predictions for Australia since the mid-1990's (see Over 50's to take over as big spenders, B&T February 21 1997, for example). The boom in discretionary spending attributable to the baby boomers enabled Australia to sail through the 1997/98 Asian Economic Crisis despite dire predictions at the time from market and government economists.
So, the message to The Economist is that it is not just companies that seem blind to the greying of consumers - the economics profession seems similarly myopic!