Odd Lots - How a Fund Manager Teaches His Kids About Money and Banking

Episode Date: March 27, 2017

Plenty of people pay their kids an allowance to teach them the value of hard work and earning money. But our guest on this week’s Odd Lots podcast takes it to the next level. Toby Nangle is a fund manager at Columbia Threadneedle Investments, who also happens to be fascinated with the question of how money and banking really work. So rather than just give his kids a typical allowance, he uses their spending money to run monetary experiments. How do children react to higher rates on savings? How do they react to negative interest rates? What are the ramifications of his policies on his own internal household wealth inequality. In this episode, Nangle talks about what he and his kids have learned in the process.See omnystudio.com/listener for privacy information.

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That's vanguard.com slash audio. All investing is subject to risk vanguard marketing corporation Distributor. Oh, and welcome to another episode of the Oddlots podcast. I'm Joe Wisenthal. And I'm Tracy Alley. So Tracy, I think we've been talking about it a lot on recent episodes, but we've had most of our episodes this year, they've kind of been gloomy or negative, just sort of, we've started the year like on a real, just sort of a down vibe, wouldn't you say? Maybe we're just capturing the zeitgeist? I don't know. Maybe, yeah, it could just be the sort of overall mood, but I think 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 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 what you think of when you think of 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 teaches his kids about finance and teaches his kids about banking and interest rates and sort of complicated questions. and he writes about these from time to time these lessons that he teaches his kids. I think anything with kids is sort of, you know, heartwarming.

Well, I was going to 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 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, they make it a little more interesting than just, you know, a few dollars a week. They actually try to teach something profound and not just teach something, but potentially learn something through the process about how people think about money.

All right. So don't keep us in suspense. Who is it? All right. Today we are going to be talking to Toby Nangle. He is the global co-head of asset allocation at Columbia Threadneedle asset management. And we have him on the line. So let's bring him in.

Toby, thank you very much for coming in today. Well, thanks very much for having me, Joe and Tracy. It's great to be here. So first of all, who are you? How many kids do you have? What do you do and how many kids do you have? And 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 that's a lot of kids. And I'm a fund manager. So part of my day job is to think about how money works 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 10 years, I've been thinking more about money and asking lots of stupid questions. And suddenly I've got this captive audience to ask stupid questions to in the form of my kids. So why wouldn't I use them? I love that. Now, as you say, most fund managers probably don't spend much time thinking about what money is or how the financial system really works. I talk to fund managers all the time, and they talk about this or that company

or this or that commodity. But before we even get to the lessons you teach your kids, why do you think this is an interesting avenue to explore? Well, I think that in the era of heterodox monetary policy, then you can have all sorts of things which sound 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 quantitative easing was first sort of, there were a lot of like

broken notes out there about how Weimar levels of hyperinflation were going to come back because it was money printing, et cetera, et cetera. And you have to kind of start to think about, can this, 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 a 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 it. 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

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? No, 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 into the issue about money. No, a lot of it was me asking them, what do you think money is, and how does it work? And then kind of doing that sort of annoying thing that kids do,

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, more often than off it, it does. These are pretty simple concepts, once you sort of remember to forget all that you thought you knew. So, you know, I think a lot of the time we think of money as something like gold.

You know, this quantity, this physical thing, there's only a certain amount of it. And the way in which we talk about budgets as adults, household budgets, that's based on the idea of a metalist view of world. So when we get down to my five-year-olds asking them, what do you think money is, they say, right, well, it's a coin. 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? And they go, what's a bank? And so we can then start to have a think about those sort of questions. All right. So let's dive into this issue. We're talking about the bank of Toby Nangle, 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 rewind a second and then

say, well, when I started, sorry, when my kids became five, they started getting pocket money. They don't get it, but when they're under five, when the five, they started getting pocket money. And they got pocket money in the form of outside money. That is to say, they 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 impart in giving people, you know, 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 to do. so. And so thinking back into our adult world, one of the reasons why people do save is because they're saving up for something or other, and they're often using interest rates. And so I started thinking about, well, 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 Nangle household bank, which was a ledger, which attacks an interest rate every week. And, you know, there have been a whole bunch of, like, behavioral psychology experiments over the decades. Probably most famous with the Stanford marshmallow experiment

was thinking like, do you want a marshmallow now? Do you want two in 15 minutes if you wait for it? And these all reveal really high internal rates of return that kids have. They have massive amounts of interest rates that they're required to kind of delay consumption. So I give them 10% a week on their balances. And I thought, well, we'll set that interest in trade

and see what happens and see whether they want to spend it on suites or whether they want to put it on on the bank and get some compound interest with the provisor they can't spend the compound interest on suites. And it seemed to work quite well. So what exactly is the rate of saving versus their spending? Because as you point out, like, when you think of children, you don't necessarily think of comfort with delayed gratification. 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 I was quite pleased that giving them this eye-wateringly high level of interest did encourage them to save for a starter.

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 changing the interest rate that you're paying to see their reaction? Yeah, yeah. So my seven-year-old got really into saving and just saved and saved and saved. Didn't spend a single penny on anything. And I kind of, you know, of course I did the math and saw that he was within about a year of owning my entire net worth, you know, really, with the power of combined interest. And so I kind of thought it was about the time that the Swiss Natural Bank went into negative interest rates. So I discussed this move of movement to negative interest rates on the, on the, on the, the of the Swiss National Bank and they thought that the Swiss National Bank was really mean. I mean, it was like a 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 50 pounds, you get zero on that first 50 pounds and

then it starts again. And that kind of changed my behavior of my nine-year-old who never saves beyond 50 pounds ever. And my seven-year-old just still determinedly saves a lot. But still, you know, buys the occasional sweet for now and again, but is really kind of target saving with a dream of one day buying an iPad, which may be several years away. I love that at least in the Bank of Nangle, there's 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 do. 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 an amazing kind of revelation once you kind of think about these things a bit. And actually, Hajun 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 this money. But actually, when

the bank lends someone money, it's basically lending you a deposit. So if you're X, Y, Z bank, and I come to you and I say, can I borrow, you know, £100 or $100, you say, sure, and you create this deposit for £100 or $100, and then 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 who might bank either with XYZ bank or another bank, which can then kind of relay the payments, through the interbank system. So that actually by borrowing money, the money is created 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, 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 run on banks. But one of the reasons is because they're 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 at the beginning of our discussion that thinking about money from the 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 QE, when quantitative easing was first announced, we had a whole bunch of people talking about the inflationary effects. And then when helicopter money started to be discussed, that inflation talk kind of went into overdrive. What can we learn from the bank of Toby Nangle when it comes to unconventional monetary policy? Well, I guess, you know, the way in which, you know, I can think of the Bank of Tobin Engel as a bunch of credits that my kids have. So, you know, actually when we started, when they said, so if I give you my 50P, 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've lent me this money and I've gone and spent it. But nevertheless, they have assets. the form of, 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 actual spending without me being able to also access that? I mean, it can get a little bit kind of tricky.

So let's take it back into the real world and think about, say, quantitative easing and helicopter to 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 did governments borrow money at all? Why is government debt in existence? And the answer kind of comes back in terms of, well, it comes back in order to keep outside money, that is to say, government money, give it some value. It 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 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 on the part of the government. So we think about, okay, well, quantitative easing, what's that? That's the government buying back, or an agent of a government, buying back 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 outside of. money, but it isn't something which necessarily leads us down 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 we think it raises taxes for rather the taxes are raised as a creating value for its currency? Yeah, I mean, I think that's right. I think governments both borrow and tax in order to keep its currency, give its currency some value and some stability, absolutely, which kind of gets into the distributional issues. Why would you tax rather than borrow? There are all sorts of distributional issues that come off that.

And all this kind of flows from just thinking about how money works really. Let's talk about, you've talked about, 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 pickety's theories. What did you learn from doing that? Is pickety big in the Nangle household among the five to nine year old demographic? I'm curious. Not in the five to nine year old, no. But, you know, when I started to like put through, you know, after the Swiss National Bank,

move 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 do you think the impact is going to be for you? And my nine-year-old, who targets save to a certain level and then spends 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 the inequality within the Nangle children household.

Whereas my 7-year-old, he knew it would be wrong to have higher rates because he knew he'd be benefiting it, and he knew there'd also be calls on his largesse from other parts of the Nangle family household. So he does already kind of like buy the four-year-old toys because he realizes he's in such a good situation that he should, like, distribute this wealth across grassy-R-Sat. Can I ask you a good parenting question? So I have a one-year-old daughter, so 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 going to be sort of like.

Clearly they're going to be like those kids, 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 smart for their own good? I honestly say that doesn't keep me awake at nightshed. So I have a question. You kind of started to get to it with the inequality stuff, but, you know, we're clearly talking about young children and young children's attitudes towards basic interest rates. But you've pointed out more than once that people's attitude to rates tends to change depending on what age they are.

So demographics ends up being a really, really big factor in all of this that doesn't necessarily get the attention it might deserve. Yeah, no, I think that's right. In fact, you know, after a couple of years of experimenting with my children and interest rates and banks and 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 potentially really quite big research questions. that aren't addressed. That is to say, most economic frameworks or models used by central banks, quite rightly, for many years, have assumed that there is a negative relationship between rates and spending.

So higher rates would discourage borrowing and encourage saving. But there are big cohorts who don't really have the access to borrow those rates. So they can't borrow more when it's lower and less when it's higher. Now, some of that are financially excluded people, which within the economic. economic sense tend to be, you know, 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 saving specifically in order to spend when you're in retirement. Or in the UK context, where there have been caps put on

household borrowing rates, there's a multiples of income. You increasingly have to save up a huge proportion of your disposable 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 borough in London is now 150% of salary whereas you know 20 years ago it was about 10% of salary so you have to save up all this amount and so you may be because your target saving for either retirement or property purchase then then the the relationship for big cohorts of the population starts to flip and

become more like my kids rather than traditional actors in the economic 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 in major developed economies over the last few years. I mean, this idea, if you're, 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, 50 years old and you want to retire sometime in the next 10 to 15 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 encourages 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 stocking away each more. It seems like a huge deal in terms of thinking about what we've seen. 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 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 there are swings and roundabouts here. I did have a chat with some folk just to kind of clarify that central banks do think about things as a kind of an infinitely lived agent who can, you know, borrow and save at the similar kind of rate rather than necessarily accounting for the

humps in demography or macro potential changes. So maybe there's something in that, but it's all a little bit speculative. And as I say, it's a sort of thing which would, I think, 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, you know, your theory of inside and outside money, 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?

Ooh. I know. I'm sorry. Yeah. I mean, I would say that my verdict on unconventional policy rates would be that or rather unconventional monetary policy was that, you know, QE1 when it came out was absolutely absolutely needed. It was an acute liquidity crisis that faced global financial system. And so allowing there to be sufficient liquidity in the system so that the, so that if you

like, the inside money banking system didn't just fall apart and everything that we think of as money just disappear. That was really important. Once we went on to QE2, QE3 and the like, that seemed to be more about what economists would call the portfolio balance effect, that is to say, targeting high levels of asset prices and trying to force people away from certain types of assets into other types of assets. And I think the results are now are pretty mixed. All the work seems to suggest that it was only successful in part. And I think that some of the stuff I've looked at with my kids

and demography more widely would suggest that for any kind of target savers then long rates or rather interest rates start to look like what's thought of as a giff in good that is to say the higher things go in price the more you need of it which would be saying the lower rates 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 with inflation and I'd put that more down to some issues with globalization rather than anything else that's going on in the world. So, and I think that bit's turning. All right. 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 Nangle? What's on the roadmap?

I haven't got anything planned, but if anyone's got any good ideas, which won't upset them too much, then please tweet them to me at Toby underscore N. All right. Well, on that note, you should follow Toby Nangle at Toby underscore N. And you should read all about his experiments at his blog, Principles and Interest at WordPress.com. Toby Nangle, global co-head of asset allocation at Columbia Threadneedle 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? Yeah, it did. It made me laugh pretty hard, particularly the bit where you subconsciously let people know that you worry that your child is going to be too smart. I enjoy that. No, I'm not worried about that. But when I started hearing these things, I was like, oh, God, these kids are going to be way more savvy than anyone they go to school with. But no, I swear I'd 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 totally agree. And it's, yeah, no, I love all those points. And we, as you say, we've hit them in different aspects before and we'll probably talk about them again, about what really. really is the banking system. Where do, where does money come from? Why do we have taxes and stuff like that? But I think that really is a sort of great framing that makes a lot of these things that are sort of theoretical and 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, oh, but you really shouldn't complain because it's going to stimulate borrowing. And that'll stimulate consumption. But that doesn't change the fact that still it 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 a, of people. Yeah, exactly. Ultimately, it runs on what people do, right? Yeah, and I am going to, I am inspired to do some of those financial experiments when my own kids get, I like that idea of waiting until they're five, though. All right, 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 Wisenthal.

You can follow me on Twitter at The Stallword. And I'm Tracy Allaway. I'm on Twitter at Tracy Allaway. And you can follow Toby, as we mentioned, on Twitter at Toby underscore N. June Grasso, inviting you to join me for the Bloomberg Law podcast. Every weekday, we help you make sense of the legal stories that shape the nation and the world. Listen for complete analysis of the biggest court cases. the latest actions from Congress and regulators and the legal moves driving the markets.

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