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. Things such as gold, diamonds and emeralds generally do have intrinsic value based on their rarity or quality and thus provide a premium not associated with fiat currency unless that currency is "promissory": That is the currency promises to deliver a given amount of a recognized commodity of a universally (globally) agreed to rarity and value, providing the currency with the foundation of legitimacy or value. Though rarely the case with paper currency, even intrinsically relatively worthless items or commodities can be made into money, so 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.
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In many countries the government has assigned exclusive power to issue or print its national currency to a central bank. For example, in the USA a "federal system, composed of a central, governmental agency—the Board of Governors—in Washington, D.C., and twelve regional Federal Reserve Banks" does this.[1] The government treasury must pay off government debt either with money it already holds or by financing it by issuing new bonds which are sold to either the public directly or the central bank in order to raise the funds required to satisfy the debt. In this latter case where bonds are placed with the central bank, the central bank will create the needed money by conducting an open market purchase, i.e. by increasing 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, leaving the system with an increased supply of base money.
When government deficits are financed through this method of debt monetization the outcome is an increase in the monetary base, the money supply. If a budget deficit persists for a substantial period of time, 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 fixed income cash flows of anyone who is holding assets based in that currency. This does not reduce the value of floating or hard assets, and has an uncertain (and potentially beneficial) impact on some equities. It benefits debtors at the expense of creditors and will result in an increase in the nominal price of real estate. This wealth transfer is clearly not a Pareto improvement but can act as a stimulus to economic growth and employment in an economy overburdened by private debt. It is in essence a "tax" and a simultaneous redistribution to debtors as the overall value of creditors' fixed income assets drop (and as the debt burden to debtors correspondingly decreases). If the beneficiaries of this transfer are more likely to spend their gains (due to lower income and asset levels) this can stimulate demand and increase liquidity. It also decreases the value of the currency - potentially stimulating exports and decreasing imports - improving the balance of trade. Foreign owners of local currency and debt also lose money, Fixed income creditors experience decreased wealth due to a loss in spending power. This is known as "inflation tax" (or "inflationary debt relief"). Conversely, tight monetary policy which favors creditors over debtors even at the expense of reduced economic growth can also be considered a wealth transfer to holders of fixed assets from people with debt or with mostly human capital to trade (a "deflation tax").
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]
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.
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 than the benefit (say, a liter of milk) in kind.
In 2005, Russia transformed most of its in-kind benefits into monetary compensation.
Before this reform there were a large system of preferences: free/reduced price of travels on local transport, free supply of drugs, free health resort treatment, etc. for diverse categories of society: military personnel, the disabled, and separately, persons disabled due to WWII, Chernobyl disaster "liquidators," inhabitants of Leningrad during the siege, former political prisoners, and just for all pensioners (women 55+, men 60+). This system was a legacy of the Soviet Union, but it was heavily extended by populist laws of central and regional authorities during the 1990s.
By the law 122-ФЗ of 22 August 2004 this system was converted into cash payments by various means:
The main causes of friction in the reform were the following:
The wave of protests emerged in various parts of Russia in the beginning of 2005 as this law started to work. But government measures (raising of compensations, normalization of bureaucratic mechanisms, etc.) eventually neutralized opposition.
The long-term effects of the monetization reform varied for various groups. Some people received compensation in excess of the services they received (e.g. in rural areas without any local transport, the free transport benefit was of little value), some have found that the compensation is insufficient to cover the cost of the benefits needed. Transport companies and railroad have obvious benefits from monetization as they receive higher cash receipts when these categories use their services (previously in some regions more than a half of passengers did not pay for municipal transport, without sufficient compensation to the companies from the government). Effects on medical system are controversial. Doctors and nurses have to use their time to fill in many forms to justify free receipts, thus reducing time spent on services.
In United States agricultural policy, "monetization" is a P.L. 480 provision (section 203) first included in the Food Security Act of 1985 (P.L. 99-198) that allows private voluntary organizations and cooperatives to sell a percentage of donated P.L. 480 commodities in the recipient country or in countries in the same region. Under section 203, private voluntary organizations or cooperatives are permitted to sell (i.e., monetize) for local currencies or dollars an amount of commodities equal to not less than 15% of the total amount of commodities distributed in any fiscal year in a country. The currency generated by these sales can then be used: to finance internal transportation, storage, or distribution of commodities; to implement development projects; or to invest and with the interest earned used to finance distribution costs or projects.[5]