Monetization

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. Such commodities 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.

The term "monetization" may also be used informally to refer to exchanging possessions for cash or cash equivalents, including selling a security interest, charging fees for something that used to be free, or attempting to make money on goods or services that were previously unprofitable or had been considered to have the potential to earn profits.

Still another meaning of "monetization" denotes the process by which the U.S. Treasury accounts for the face value of outstanding coinage. This procedure can extend even to one-of-a-kind situations such as when the Treasury Department sold an extremely rare 1933 Double Eagle, the amount of $20 was added to the final sale price, reflecting the fact that the coin was considered to be issued into circulation as a result of the transaction.

Monetizing debt

In many countries the government has assigned exclusive power to issue or to print its national currency to a central bank. The government treasury must pay off government debt either with

1. money it already holds (e.g. income or liquidations from a sovereign wealth fund)
2. taxes collected from the public
3. money it creates "out of thin air" (printing press money now electronic)
4. or by financing it by issuing new bonds

Government bonds may be sold to the public directly or to the central bank when government needs money to repay bonds that have come due. In effect, these bonds are promises to create money in the future, causing monetary inflation.

The central bank may purchase government bonds by conducting an open market purchase, i.e. by increasing the monetary base through the money creation process. If government bonds that have come due are held by the central bank, the central bank will return any funds paid to it back to the treasury. Thus, the treasury may 'borrow' money without needing to repay it. This process of financing government spending is called 'monetizing the debt'.^[1]

Central banks are usually forbidden by law from purchasing debt directly from the government. For example, the Treaty on the Functioning of the European Union (article 123) expressly forbids EU central banks' direct purchase of debt of EU public bodies such as national governments. Their debt purchases have to be from the secondary markets. Monetizing debt is thus a two-step process where the government issues debt to finance its spending and the central bank purchases the debt, holding it until it comes due, and leaving the system with an increased supply of money.

Effects on inflation

The sections below apply when the inflation rate is steady or rising. If the inflation rate is falling or is negative, the sections below need to be re-interpreted in the light of that context. References for using monetization for policy reasons in these circumstances are replete in the publications of the Bank or England and the Federal Reserve relating to monetary policy in years such as 2012 and 2013 ; when this action was taken to prevent potentially dangerous disinflation or even negative inflation. Reference to one source may be potentially mis-leading. In future years comprehensive, definitive fully retrospective reports on this period will have been written, but none exist now.

When government deficits are financed through debt monetization the outcome is an increase in the monetary base, shifting the aggregate-demand curve to the right leading to a rise in the price level (unless the money supply is infinitely elastic).^[2][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]

Revenue from business operations

In some industry sectors such as high technology and marketing, monetization is a buzzword for adapting non-revenue-generating assets to generate revenue. Web sites and mobile apps that do generate revenue are often monetized via advertisements, subscription fees or (in the case of mobile) in-app purchases. A previously free product may have premium options added thus becoming freemium.

Failure to monetize web sites due to an inadequate revenue model was a problem that caused many businesses to fold during the dot-com bust. David Sands, CTO for Citibank Equity Research, affirmed that failure to achieve monetization of the Research Analysts' models as the reason the de-bundling of Equity Research has never taken hold.

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 than the benefit (say, a liter of milk) 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.

Russian social welfare monetization of 2005

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:

• abolition of preference, compensated by raising of wage (e.g. free use of local transport for military personnel) or pension (e.g. different preferences for Chernobyl liquidators)
• for three most important preferences (free local transport, 50%-price suburban rail transport, free supply of drugs): a choice between this preference and some extra money.

The main causes of friction in the reform were the following:

• technical and bureaucratic problems (e.g. for usage of 50% discount for suburban rail transport a person should present a paper from local State Pension Fund office stating that he/she doesn't choose monetary compensation);
• separation of all preference-recipients into federal and regional accordingly to the body issuing a preference legislation. The largest group, that is pensioners, was regional. It was the main cause of problems:
  • In poor regions local government had to abolish these preferences with small or zero compensation.
  • Even if these preferences were retained, they could apply only to pensioners of this region, so, e.g. Moscow Oblast pensioners cannot use Moscow metro and buses freely. (Later these problems would be generally solved by a series of bi-lateral agreements between neighboring regions.)

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.

United States agricultural policy

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]

See also

• Remonetisation
• Demonetisation
• Data monetization
• Patent monetization

References

External links

• Monetizing the Debt