As the kids get older, they are increasingly inquisitive about money. The curiosity reveals itself in their questions, which are usually naïve but occasionally insightful. Like: how do credit cards work? Or, why people choose to live where they do, and how much do their friends' parents make? Oh, and what happens to their red pocket money every Chinese New Year?[1]
These can be challenging conversations[2]. Some of it is simply due to the math of finance, with concepts like compound interest that are unintuitive. But more than that, it's that money is an abstraction, and abstractions are hard to reason through concretely. It's an invention where we assign agreed-upon numbers to objects and services, and trade with each other based on this mutual understanding.
Upon this wobbly tower rests the industry of finance.
I've been an avid reader of the Money Stuff newsletter for years. Its longtime author, Matt Levine, picks out 4–5 finance stories a day and dives deep into their peculiarities with a wry sense of humor. On one side, there are complex machinations, derivatives and longs and shorts and hedges and arbitrages, the instruments of finance employed to eke out profits at scale. On the other side, we have groups of humans, who may be into gambling or memes or ESG[3] or fraud.
A Levine bit is that "everything is securities fraud." It's an inside joke with a dash of truth: when companies do bad things that are only tenuously related to their business—like mistreating animals or leaking customer data—they get hit with securities lawsuits anyway. These suits claim shareholder harm, as the bad news tends to drop the stock price, and public companies are required to disclose material risks in accordance with US securities law.
To be clear, the premise is darkly humorous, but still absurd. But the mechanism that makes this class of litigation possible is that a company's financial standing is defined by its equity (i.e., market capitalization and share price), and an entire universe of corporate and personal behaviors can be coupled to that financial representation. The real-world behaviors may be morally or logistically lacking, but the abstractions are the easy targets.
The intersection of the quantifiable and the human is what makes finance endlessly fascinating. Financialization builds a frictionless interface on top of reality.
The crude oil futures commodities market is probably the best example of financialization in practice. As the name suggests, it's the market where traders bet on the price of barrels of oil in the near future, but only the prices—the underlying hard asset, the crude oil itself, does not change hands the vast majority of the time. It's one of the simpler forms of a financial derivative, where the assets being bought and sold are related, but separate, from their underlying things.
And the reason oil futures exist is that an abstract market is much easier to work with. Rather than haul barrels of oil around, traders can add, subtract, and multiply numbers on computers, all hours of the day. Inevitably, traders built more abstractions on top of the existing futures market abstraction: hedges against jet fuel prices, leveraged bets on price movements.
For oil futures, their black swan event occurred in April 2020, a month into the COVID lockdowns, when the sudden plunge in demand and the glut of supply of oil briefly pushed the price negative—a historic first for the market. The implication was that traders would rather pay than have to take delivery of oil they already bought.
On a more positive note, there's some evidence that the discovery of trade and the ensuing invention of money helped advance civilizations; Money: A Story of Humanity lays out one such example in Florence. The strength of its trade and monetary systems gave rise to the mercantile class, and the need to manage capital led to innovations in bookkeeping and accounting. The mastery of money and its layered abstractions made Florence a rich and powerful city, which in turn used its wealth to advance the humanities, making it a cradle of the Italian Renaissance.
But, regardless of how we might feel about this abstraction personally, we live in a capitalist society, so fluency with money—and at least some of its aspects and abstractions—is critical. So every Sunday, my kids get their allowance: $x a week for x years of age. I insist, though, that instead of handing them cash[4], we keep a notebook tallying their running totals: a credit for the allowance, and debits when they want to spend it. After a few years of this, it starts looking a bit like my bank statements, which was precisely the point.
The answer is that it goes in an envelope we hide and draw cash from. We do make sure to deposit the full amount into their UTMA savings accounts. ↩︎
To be fair to my kids, they're not the only ones who get confused; I had to read a pamphlet on annuities my parents' bankers pushed on them 3× over, and then explain to them why it wasn't a good product. ↩︎
It stands for Environmental, Social and Governance, a framework that was popular a few years back as a proxy for a company's moral standing, at least among some socially-conscientious investors. ↩︎
This is in direct contrast to some personal finance recommendations that suggest giving kids dollar bills so they can feel the money with their hands and understand its heft. ↩︎
