How a Fund Manager Teaches His Kids About Money and Banking

today is going to be a break for that. I think not only is today's episode hopefully not going to be depressing, but actually might be sort of very positive and uplifting and maybe even kind of heartwarming. Joe, let me tell you, I could use both, um, some heartwarming and some cheering up. So what are we talking about? So we're going to be talking to a fund manager, which I guess is not often the uh you think

of when heartwarming or uplifting. But he's a really interesting writer, a really interesting thinker, and he's a writer and one of the things that he does is he um teaches his kids about finance, and teaches his kids about banking and interest rates and sort of complicated questions. Um, and he writes about these from time to time, these lessons that he teaches his his kids. I think anything with

kids is sort of you know, heartwarming. Well, I was gonna say, does that mean we're going to get a bunch of really cute stories about how kids spend their allowance and that sort of thing, because I'd be up for that. I think that's basically going to be it. We're going to have an episode of cute stories about kids spending their allowance money more or less, but it's going to tell us something important about finance and money

as well. Right, yeah, exactly. So. I think like most parents, you know, a lot of or a lot of parents might give their kids some sort of allowance, maybe a few dollars a week for taking out the trash or making their bed or anything. But of course, when a fund manager does it, especially one who's very into the theoretical constructs of the financial system, uh, they make it a little more interesting than just you know, a few

dollars a week. They actually try to teach something profound and I just teach something, but potentially learn something through the process about how people think about money. Alright, so don't keep us in suspense. Who is it? All right? Today, we're going to be talking to Toby Nangle. He is the global co head of asset Allocation at Columbia thread Needle Asset Management, and we have him on the line, so let's bring him in. Toby, thank you very much

for coming in today. Oh, thanks very much for having me, Joe and Dracy. It's great to be here. So first of all, who are you? Who are you? How many kids do you have? What do you do and how many kids do you have? And why do you why do you like to use spending money and allowances as a way of sort of exploring the financial system. Sure, okay, I've got three kids who are four, seven, and nine

years old, and uh, that's a lot of kids. And I'm a fund manager, so I part of my day job is to think about how money works and and and that sort of thing. And actually, to be honest, I spent probably a lot of my career, as do most fund managers, not really thinking very much about money

and just sort of taking it for granted. But probably over the past ten years I've been thinking more about money and asking lots of stupid questions, and suddenly I've got this captive audience to ask you the questions to in four of my kids. So why wouldn't I use them? I love that. Now, as you say, most fun manager probably don't spend much time thinking about what money is

or how the financial system really works. I talked we talked to fund managers all the time, and they talk about this of that company or the shaveta, you know, commodity. But before we even get to the you know, the lessons you teach your kids, why do you think this

is an interesting avenue to explore? Um? Well, I think that in the era of heterodox monetary policy, then you can have all sorts of things which sounds quite scary or weird or wacky, which aren't actually really scary or wheel and wacky once you think about money a bit so because there can be something like helicopter money coming or when quantitive easing was first was first sort of there are a lot of like broken notes out there about how mr levels of hyperinflation we're going to come

back because it was money printing, etcetera, etcetera, And you have to kind of start to think think about can this inter is this good advice or can it interfere with good decisions? So I think it was become incumbent upon everyone to think a little bit more about it. And there's this Chinese proverb which a friend of mine let me in on, which is a fish is the last and no water. And I think that's a lot of that's pretty true in the case of finance, folks

and money. We're surrounded by what we think of it as something which is solid, but it's not. It's a social construct. It's something that we invent in different ways to do different things with. So Toby on that note, when you have um your four year old come up to you and ask you what is money? What exactly do you say to them? I hope you don't use

words like heterodox right now? Well, to be fair, the four year old keeps out of it for now because I've started when they're five, So at five years old, they get a they get into the issue about money. Now. A lot of it was me asking them what do

you think money is? And you know, how does it work? What, and then kind of doing that sort of annoying thing that kids do, uh, and which is to ask a question about the answer, and just keep on going and keeping on going and seeing if it got to the same sort of place that I went to, and by thinking about these thing more of from off it it does. These are pretty simple concepts when you once you sort of remember to forget all that you thought you knew.

Uh So, you know, I think a lot of the time we think of money as as something like gold. You know, it's it's this this quantity of this physical thing. There's only a certain amount ofment. And the way in which we talk about budgets as adults, household budgets, that's based on the idea of a kind of a metalist view of worlds. So when we get down to five year old asking them what do you think money is? They say, right, well, it's it's a coin, you know,

It's it's pretty straightforward. It's a coin. What do you do with it? Why? I exchange it for other things? So how about what about money in a bank? What's a bank? And so we can then start to have a think about those sort of the questions. All right, so let's dive into them. This issue we're talking about the Bank of Toby and Angle, the depositors are your

seven and your nine year old. Something that you've written about is this fact that probably almost nobody knows, which is that we really use two kinds of money throughout our lives. There's inside money and outside money. What do these two different terms mean? And how do you convey this to your kids? Okay, right, let's let's rewind a second and then say, well, when I when I started, sorry, when my kids became five, they started getting pocket money,

they didn't get it. But when they're under five, when the five started getting pocket money, um, and they got pocket money in the form of outside money, that is to say, they've got coins, so a bunch of coins every week. And what I found with after a while that they just spent these coins every week, which you'd say, fair enough, it's their pocket money, but to the point whereby they felt almost annoyed that they still had some money left that they hadn't spent, so they had to

find something to spend it on. I thought, this is not the lesson really that I wanted to in part in giving people, you know, giving giving my kids pocket money, I wanted them to think about saving and you know, delay gratification. This kind of stuff, but I haven't really given them the instruments of doing so. And so, thinking back into our adult world, you know that one of the reasons why people do say is because they're they're saving up for something or other, and they're often using

interest rates. And so I started thinking about, well, what what we might need to do is to have inside money as well as outside money, so not just coins, but also a bank. So we started up the an Angle Household Bank, which was a ledger, which and which attacks an interest rate every week. And you know, they're be a whole bunch of like behavioral psychology experiments over the decades, probably most famous with the Stanford Marshmallow experiment

was thinking, like, you do you want to marshmalloon? Now do you want two in fifteen minutes if you wait for it? And these these all reveal really high internal rates of return that kids have. They have massive amounts of interest rates that they are required to to kind of delay consumption. So I get I give them ten

percent a week on their balances. Uh, And I thought, well, we'll set down into train and see what happens and see whether they want to spend it on suites or whether they want to put it on the bank and get some some compound interest with the proviser. They can't spend their compound interests on suites, and it seemed to work quite well. So what exactly is the rate of saving versus they're spending? Um? Because, as you point out, like when you think of children, you don't necessarily think

of comfort with delayed gratification. UM, So I'm curious to learn more of exactly how much they're spending versus saving. Yeah. I mean, my seven year old and nine year old have got really quite different savings habits, so that I was quite pleased for giving them this eyewateringly high level of interest did encourage them to save for a starter h and also kind of you know, I could talk to them about payday lending having those kind of rates in reverse if you like. So they're probably a bit

frightened of that in terms of borrowing. Have you ever experimented with, um, changing the interest rate that you're paying to see their reaction? Yeah? Yeah, so my my my seven year old got really into saving and just saved and saved and saved, didn't spend a single penny on anything.

Uh and uh, and I kind of you know, of course I did the math and saw that he was within about a year of owning my tire net worth, you know, with the com power combined interests and so so I kind of thought it was about the same time that the Swiss National Bank went into negative interest rates. So I discussed this move of movement in negative interest rates on the on the of the Swiss National Bank, and and they thought that the Swiss National Bank was

really mean. I mean, it was like horrible, horrible institution. But then also discussed that I was going to put through an interest rate change as well, and put through a tiered interest rate change to reduce savings. So if you get up to fifty pounds, you get zero on

that first fifty pounds and then it starts again. And that kind of changed my my behavior of my nine year old who never saves beyond fifty pounds ever, and my seven year old he just still determinedly saves a lot, but still you know, by the occasional sweet from now now and again, but is really kind of target saving with the dream of one day buying an iPad, which

maybe several years away. I love that at least in the bank of Nngle there's a relationship, a clear relationship between rates and savings since in the real world, you know, central banks are still trying to fiddle with that and

get it just right. Before we move on to the next point, I still think if you can explain, maybe even perhaps for a level above seven and nine year olds, this distinction between outside money and inside money, I still think very few people would even realize that there are two different things. But as you say, you know, the two different kinds of money, coins versus the money in your bank are as different as oil and water. Not only are they different, but they actually never even mix.

Can you just explain that a little for them. Yeah, sure, I mean, it's it is. It is an amazing kind of revelation once you kind of think about these things a bit. That's and actually Hodgin Chang, who's an academic at Cambridge University, put it really nicely that banking is essentially a confidence trick, but a socially useful one. Insofar as I still tend to think, even though I know this distinction, that the money in the bank is still kind of like real money. It's still notes and coins,

but in a form of a bank. I know I've lent to the bank that this money. But actually, when when the bank lends someone money, it's basically lending you a deposit. So if you're X y Z bank and and I come to you and I say, can I borrow you know, a hundred pounds or hundred dollars, you say sure, and you create this deposit for a hundred pounds or hundred dollars uh, And then I've got I've got this deposit, which itself is simply just an entry

in the bank's book. And then I've got a loan, which is another entry in the bank's book, and I can spend that deposit by usually buying something from someone else you might bank, either with X y Z bank or another bank, which can then and then kind of relay the payments through the inter banking system. Um. So that actually by borrowing money, the money is created out of out of nothing by the private sector banking system.

And most of the money, in fact, almost all of the money that we think we have of is this is this inside money that's inside the system. And we all know that if everyone tried to get their money out of the bank at the same time, the banks would collapse. There'd be a run on banks. But one of three reasons is because there just isn't enough outside money. It's not because the banks have done anything foolish with it, but it simply doesn't exist for them to transfer into

outside money. You mentioned, um at the beginning of our discussion that thinking about money from perspective of children, and also using this inside outside framework can help explain some of the weirder things that have been happening in terms

of monetary policy over the past few years. For instance, you know when QUI, when quantitative using was first announced, we had a whole bunch of people um talking about the inflationary effects, and then when helicopter money started to be discussed, Um, that inflation talk kind of went into overdrive. What can we learn from the Bank of Toby n Angle when it comes to unconventional monetary policy? Well, I guess you know the way in which I can think of of the Bank of Toby n Angle as a

bunch of credits that my kids have. So actually, when when we started, when they said so if I give you my fift p where are you going to put it? I said, well, I'm going to spend it, thank you, And they're like no, no, no, no, But seriously, like where are you going to put it? Is it in a jar or is it in your pocket? I said no, seriously, I'm going to go and spend it. You know, you've lent me this money and I've I've got and spend it. But nevertheless, they have assets in the form of of um,

you know, this liability that I've incurred. And if we start to think about like increasing the liability that I have because their assets are going up, does this become inflationary because they've got more assets which they can't translate into into into actually spending without without me being able to also access that. I mean, it's can get a little bit kind of tricky. So let's take it back into the real world and think about say quantity US

and and UH and helicopter money. I guess taking this whole idea of inside out my outside money a step further, you'd say, well, you know, if outside money is basically money that governments invent to pay their bills and then like give value to you by demanding taxes that are to be paid in it in punishment of administered violence, which is basically what outside money is, then you say, well, why why did governments borrow money at all? What why

is government debt in existence? And the answer kind of comes back in terms of, well, it comes back in order to keep keep outside money, that is to say, government money, give it some value. Can either be taxed away to keep its stock from exploding on the upside, or it can be borrowed back from the people or other people to whom it's it's given in the first place. And so government debt becomes an instrument of monetary sterilization on the part of the government, simply in the same

way that taxation is an implement of sterilization. Monetary sterilization and part of the on the government. So we think about okay, well, quantitybiz and what's that. That's the government buying back or an agent of the government buying back. Uh. These sterilization instruments, that is to say, debt in exchange for zero duration instruments, that is to say, government money or outside money. And when is that dangerous? Well, that can be dangerous if people start to spend it a lot.

But what happens then you can just unwind it in order to control the quantity of of of of outside money. But it isn't something which necessarily leads us down there the exploding credit. This is kind of like this is kind of the second huge revelation already. So first we have this revelation that the money in our pocket and the money in our bank are two totally separate things.

And then you have this and then also this idea that the government doesn't really borrow, and it doesn't really in the way we think of borrowing, and it doesn't raise taxes for the purpose that it rate that we think it raises taxes for. Rather, the taxes are raised as a creating value for the for its currency. Yeah,

I mean, I think that's right. I think both government governments both borrow and tax in order to keep its currency give it, give it its currency some value and some stability absolutely, which which kind of gets into a distributional issues. Why would you tax rather than borrow? You know, there are all sorts of distribution issues that come off that, and all this kind of flows from just thinking about how money works. Really, let's talk about you talk learned

some lessons about household political economy. You wrote a post on your blog about sort of what you've learned about inequality and some of picketty is theories. What what did

you learn from doing that? Is picketty big in the Nangle household among the five to nine year old demographic, I'm curious, um, not in the five to nine year old no, but but you know when when when I start to like put through, you know, after the Swiss National Bank moved to negative rates and started to change interest rates, I started having a chat to them about so if I change interest rates, you know what, what do you think the impact is going to be for you?

And my my nine year old, who targets saved to a certain level and then spend it on stuff, knows if you like her own reaction function to these things, and was kind of outraged at the idea that there could be higher rates when I then talked about reversing it because from her perspective, she would not be a beneficiary of this, and so that would increase your inequality

within the n Angol Children household. Whereas my my seven year old, he knew it would be wrong to have higher rates because he knew he'd be benefiting it, and he knew they'd also be calls on on his his largest from other parts of the n Angle family. House that so he does already kind of like buy the four year old toys because he realizes in such a good situation that he should like distribute this scale at

this wealth across grassyrest skill quaver parenting questions. So I have a one year old daughter, so I won't I'm not going to be doing any of these experiments for

a few years yet. But do you ever worry that your kids are just going to be like so much more, so much smarter and savvier than all the other kids in school, and that they're just, oh my god, clearly like those kids, that your kids are just going to be like running circles around all the other kids in school, Like, do you worry they're just going to be you know, it's almost almost too too too smart for their own good. I honestly say, I that doesn't keep me awake a night.

So I have a question that you kind of started to get to it with the inequality stuff. But, um, you know, we're clearly talking about young children and young children's attitudes towards basic interest rates. Um, but you've pointed out more than once that people's attitude two rates tends to change depending on what age they are so demographics ends up being a really really big fa actor in all of this that doesn't necessarily get the attention it

might deserve. Yeah, no, I think I think that's right. In fact, you know, after after a couple of years of experimenting with my children are and interest rates and banks and are like and thinking about how their reaction functions change as savers and like, and thinking about that into the real world, there actually tend to be some some potentially really quite big research questions that aren't addressed.

That is to say, most economic frameworks, it all models used by central banks quite rightly for many years, have ever assumed that there is a negative relationship between you know, rates and spending, so higher rates would discourage borrowing and encourage saving. But there are there are big cohorts who don't really have the access to to borrow at those rates, so they can't borrow more when it's lower and less

when it's higher. Now, some of that financially excluded people, so which which within the economic sense tend to be

relatively marginal. But then increasingly you have demography playing a part, as you say, Tracy, So with a whole bunch of people getting older, how do you debt finance retirement, you know, I mean you're you're saving specifically in order to spend when you're in retirement or in the UK context where they've been caps put on household borrowing rates as and multiples of income, you increasingly have to save up a huge proportion of your disposal income to get a deposit

for a property. So I saw something out by Residential Analysts Limited which was saying that, you know, the average deposit for first time byron in London is now a hundred and fifty percent of salary, whereas you know, twenty years ago it was about ten percent of salary. So you have to save up all this amount, and so you maybe because your target saving for either retirement or

property purchase. Um then then the relationship for big cohorts of the population starts to flip and they become more like my kids rather than sort of traditional actors in econom makes sense this point, and you've talked about you've been writing about this recently strikes me as incredibly important and potentially significant for understanding sort of things that have gone on and major developed economies over the last few years.

I mean, this idea, if you're you know as you say, the traditional way of talking about it, low rates that encourages you to save less and to spend more and

boost the economy. But on the flip side, if you're say fifty years old, and you want to retire some time in the next ten to fifteen years, and you want to have a certain amount of money to be able to draw on every year during your retirement, low rates actually encourage forces you, essentially, is what you're saying, to put more in retirement, because if you're getting paid less on your investment assets, you basically have to compensate

for that by socking away each more. It seems like a huge deal in terms of thinking about what we've seen. I I think that potentially it's quite big. But at the same time, it's important not to overstate the fact that actually low rates do you mean that businesses can often access finance more cheaply and they might be able to employ more unemployed people than they would otherwise do, So that there, you know, there are swings and roundabouts here. I I did have a chat with some folks just

to kind of clarify that central banks. Do you think about things as a kind of infinitely lived um agents who can you know, borrow her and save at the similar kind of rate rather than necessarily accounting for the humpson demography or macro potential changes. So so maybe there's something in that, but it's it's all a little bit speculive, and as I say, it's a sort of thing which would I think be deliver interesting research questions that people

can do some proper data analysis on. But as it is, it just feels intuitively important. As you say, I agree with you, Toby. Can we put you on the spot and can we ask you to sort of bring all this together, Um, you know, your theory of inside and outside money, the bank of Toby Nangle within your household, your children's reaction to interest rates, and give us your verdict on the success of low rates and unconventional monetary policy over the past six or seven years. Oh, I know,

I'm sorry. Yeah, I mean I would say that my verdict on unconventional policy rates would be that, or rather unconventioned much policy was that, you know, QUE one when it came out was absolutely absolutely needed. It was a cute liquidity crisis that faced global financial system, and so allowing there to be sufficient liquidity in the system, so that the the so that if you like, the inside money banking system didn't just fall apart and everything that

we think of his money just disappear. That was really important. Once we went on to QB two, QB three and the like that those if that seemed to be more about what a condoci call the portfolio balance effect, that is to say, target high levels of asset prices and trying to force people away from uh certain types of assets into other types of assets. And I think the results and add are pretty a pretty mixed. All the work seems to suggest that it was only successful in part.

And I think that you know, some of the some of the stuff I've looked at with my kids and uh and demography more widely would suggest that for any kind of target savers, then uh than then long rates or rather interest rates start to look like what's sort of as a gift in good that is to say, the higher things going price, the more you need of it, which would be a was saying the lower rates, the

more the more you have to save. But then in the background to all that, you've got this kind of secularly falling real rate which seems to equate inflation and and I'd put that more down to some some issues with globalization rather than anything else that's going on in the world. So and I think that bids turning. Alright, final question, and then we have to wrap up. Are you planning any more experiment or potential policy innovations that we should be watching for at the Bank of n Angle?

What's what's on the roadmap? I haven't got anything. I haven't got anything planned. But if anyone's got any good ideas which won't upset them too much, then please please tweet them to me at Toby Underscore. All right, Well, on that note, you should follow Toby Nangle at at Toby Underscore and and you should read all about his experiments at his blog Principles and Interest dot WordPress dot com. Toby Nangle, Global cohead of Asset Allocation at Columbia thread

Needle Asset Management. Absolutely great to talk to you and have you on the podcast. Thanks for having me, well, Tracy, did that lift your mood and break the streak of negative episodes that we've had sufficiently? Uh? Yeah, it did. It made me laugh pretty hard. Um, particularly the bit where you uh subconsciously let people know that you worry that your child is going to be too smart. I enjoyed. No,

I'm not worried about that. But when now you started hearing these things, I was like, oh God, these kids are going to be like way more savvy than anyone they go to school with. But no, I swear I never that. It didn't cross my mind. Okay, on a serious note, though, I mean, I thought that was a really really fun framing of what can be a quite geeky topic that we tend to discuss quite a lot

on the show, which is what is money? Yeah? No, I I totally agree, and it's um yeah, no, I love all those points and we we as you say, we've hit them in different aspects before and we'll probably talk about them again. But what really is the banking system? Where do where does money come from? Why do we have access? And stuff like that. But I think that really is is sort of great framing that makes a lot of these things that are sort of theoretical abstract

very concrete. Yeah, and talking about it through the eyes of kids kind of brings home the behavioral aspect of interest rates and money. Like you know when people talk about negative rates, there's just an emotion involved there there's kind of a sense of unfairness, and that really comes through when you're talking about seven or nine year olds. Right, yeah,

that's absolutely right. And you know, you sort of have this thing in the real world where central banks might cut rates to zero or negative and then people complain, and then economists say, but you really shouldn't complain because it's going to stimulate borrowing and that's to me a consumption. But that doesn't change the fact that still that upsets people in the real world, and you can't just abstract it away by saying it's irrational, because ultimately the economy

is just full of people. Yeah, exactly. Ultimately it runs on what people do, right, Yeah, and I am going to uh, I am inspired to financial experiments when my own kids get okay, I like that idea of waiting until they're five though. Alright, so let's see, in four years we'll be doing an Odd Lots episode about introducing your daughter to the concept of money, right exactly, follow up episode. I look forward to that. All right. This has been another episode of the Odd Lots Podcast. Thanks

for listening. I'm Joe wi Isn't thal. You can follow me on Twitter at the Stalwart and I'm Tracy Alloway. I'm on Twitter at Tracy Alloway. And you can follow Toby as we mentioned on Twitter at Toby Underscore in