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Monetization is the process of converting or establishing something into legal tender.

It usually
refers to the coining of currency or the printing of banknotes by central banks, but things such as
gold, diamonds and emeralds, and art can also be monetized. Even intrinsically worthless items
can be made into money, as long as they are difficult to make or acquire. Monetization may also
refer to exchanging securities for currency, selling a possession, charging for something that
used to be free or making money on goods or services that were previously unprofitable.

Monetizing debt

In many countries the government has assigned exclusive power to issue or print its national
currency to independently operated central banks. For example, in the USA the independently
owned and operated Federal Reserve banks do this.[1] The government must instead pay with
currency already in circulation, or else finance deficits by issuing new bonds, and selling them to
the public or to their central bank to acquire the necessary money. For the bonds to end up in the
central bank it must conduct an open market purchase. This action increases the monetary base
through the money creation process. This process of financing government spending is called
monetizing the debt.[2] Monetizing debt is thus a two step process where the government issues
debt to finance its spending and the central bank purchases the debt from the public. The public
is left with an increased supply of base money.
[edit]Effects on inflation
When government deficits are financed through this method of debt monetization the outcome is
an increase in the monetary base, or the money supply. If a budget deficit persists for a
substantial period of time then the monetary base will also increase, shifting the aggregate
demand curve to the right leading to a rise in the price level.[3] When governments intentionally
do this, they devalue existing stockpiles of wealth of anyone who is holding assets based in that
currency. It is in essence a "tax" as the overall value of their assets decrease due to a loss in
spending power. This is known as "inflation tax".
To summarize: a deficit can be the source of sustained inflation only if it is persistent rather than
temporary and if the government finances it by creating money (through monetizing the debt),
rather than leaving bonds in the hands of the public.[4]
[edit]Examples
Monetizing the debt can be used as a component of quantitative easing strategies, which involve
the creation of new currency by the central bank, which may be used to purchase government
debt, or can be used in other ways.
However, there can be an insidious effect. As noted macroeconomist Nouriel Roubini noted:
“ When governments reach the point where they are borrowing to pay the interest on their
borrowing they are coming dangerously close to running a sovereign Ponzi scheme. Ponzi
schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to
increase tax revenues, or cut spending, or monetize the debt--or most likely do some combination
of all three.[5] ”
[edit]Revenue from business operations

In some industry sectors, monetization is a buzzword for adapting non-revenue-generating assets


to generate revenue. Failure to monetize web sites was a problem that caused many businesses
to fold during the dot-com bust. Web sites that do generate revenue are often monetized via
advertisements or subscription fees.
[edit]Monetization of non-monetary benefits

Monetization is also used to refer to the process of converting some benefit received in non-
monetary form (such as milk) into a monetary payment. The term is used in social welfare reform
when converting in-kind payments (such as food stamps or other free benefits) into some
"equivalent" cash payment. From the point of view of economics and efficiency, it is usually
considered better to give someone a monetary equivalent of some benefit (say, a liter of milk)
than the benefit in kind.
Inefficiency: in the latter situation people who may not need milk cannot get something of
equivalent value (without subsequently trading or selling the milk).
Black market growth: people who need something other than milk may sell it. In many
circumstances, this action may be illegal and considered fraudulent. For example, Moscow
pensioners (see below for details) often give their personal cards that allow free usage of local
transport to relatives who use public transport more frequently.
Changes on the market: supply of milk to the market is reduced by the amount distributed to the
privileged group, so the price and availability of milk may change.
Corruption: firms that should give this benefit have an advantage as they have guaranteed
consumers and the quality of the goods supplied is controlled only administratively, not by market
competition. So, bribes to the body that choose such firms and/or maintain control can take place.